CHICAGO — Moody’s Investors Service presented Chicago with a second dose of negative rating news Friday when it downgraded the city’s general obligation credit one level to Aa3 due to concerns about its 2011 budget deficit and evaporating financial reserves.

The downgrade to Aa3 with a stable outlook from Aa2 affects $6.8 billion of outstanding GOs.

The action occurred Friday, one day after Fitch Ratings moved to lower the city’s GO credit a notch to AA with a negative outlook.

Chicago’s balance sheet is being strained by poor collections from economically sensitive taxes as the city contends with rising labor costs.

Mayor Richard Daley has vowed not to raise property taxes. Daley last year steered clear of service cuts, but described them as an option as the city seeks to erase $654.7 million of red ink ahead of the release of a $6.3 billion budget this fall.

“They have depleted reserves at a rapid pace and now are facing a large gap in their preliminary budget,” Moody’s analyst Edward Damutz said of Chicago. “And, there’s an unwillingness to increase property taxes to offset limited revenue streams.”

Reserves have plummeted to $790 million from a previous high of $2 billion. Daley used $500 million from reserves to help balance the 2009 budget and drained $350 million for the same purpose in 2010.

The city set up a series of short-term, mid-term, and permanent reserves with proceeds from its $1.8 billion lease in 2005 of the Chicago Skyway toll bridge and the $1.14 billion lease in 2009 of its parking meter system.

It also tapped $126 million in earnest money from the private consortium that backed out of a proposed $2.5 billion lease of Midway Airport last year.

Damutz said the rating agency is concerned about the city’s ability to wean itself from reserves, especially if revenues don’t significantly recover over the next two years.

“The question is, can they reverse the trend?” Damutz said.

Chicago’s chief financial officer, Gene Saffold, said in a statement that he doesn’t expect a significant impact on borrowing costs.

He defended the use of reserves to balance recent budgets, describing them as the best option during difficult fiscal times.

“Utilizing one-time resources like reserves is not something Mayor Daley wanted to do, but he was forced to choose that option in order to combat the catastrophic effects of the national recession on our city budget and Chicago residents,” Saffold said, adding that the government still retains a strong level of reserves.

Chicago set up a $500 million permanent reserve in 2005 with Skyway lease proceeds. Rating analysts upgraded the city after the move.

Other factors that analysts considered in their downgrade was the city’s high debt burden and slow amortization rate, and an unfunded pension liability of $14.57 billion.

Chicago’s four pension funds are funded at a combined ratio of just 43%. The city’s rating remains high, Damutz said, and is supported by its broad and diverse economy.

The rating review comes ahead of the sale later this month of $164 million of tax-exempt GOs and taxable Build America Bonds to fund the Modern Schools Across Chicago Program, which taps tax-increment financing funds to repay debt issued for new school construction projects.

Chicago will sell $70 million of GO tender notes in a separate transaction later this month.

It has another new-money and refunding GO issue for up to $900 million planned later this year.

Standard & Poor’s rates the city’s GOs AA-minus with a stable outlook.

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