Moody’s Investors Service Tuesday downgraded the city of Natchez, Miss.’s general obligation rating to A2 from A1.

The lower rating affects $3 million of outstanding debt rated by Moody’s. Natchez has an additional $11.9 million of GO debt not rated by Moody’s, but it is considered in the city’s credit analysis, according to the rating agency.

“The downgrade to A2 reflects the city’s limited financial position, including narrow cash levels within the general fund,” said Moody’s analyst Joshua Travis. “The rating further considers the average-sized, but concentrated, tax base, below-average socioeconomic profile and a manageable debt burden.”

Located along the Mississippi River, Natchez serves as a regional economic center near the Louisiana-Mississippi border. The city has a population of 15,672, two casinos, and is known for its historic homes.

“While the city has historically maintained narrow levels of reserves, we believe that these levels are marginal considering the economically sensitive nature of the sales and gaming tax receipts that are a large source of revenue for the general fund,” Travis said. The city experienced back-to-back deficits in fiscal 2009 and 2010 due to flattening of sales tax revenues.

For fiscal 2012, Travis said management reported that expenditure savings and increased revenues resulted in a modest $297,371 surplus. The city has budgeted for a modest $62,000 surplus in fiscal 2013.

“Management reports that expected new revenue streams will benefit the city going forward,” Travis said. “These new revenues include proceeds from an oil well on city property which should provide approximately $276,000 annually, $1 million in annual lease payments made by a new casino within city limits, as well as a millage transfer to benefit the general fund.”

The new casino is also expected to increase assessed valuations within the city beginning in fiscal 2014, resulting in increased property tax revenues.

“Future rating reviews will consider how the city manages these new revenue streams and focus on the city’s ability to build reserves to healthy levels,” Travis said. “Inability of the city to right size operations could place additional negative pressure on the rating.”

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