Moody's Investors Service Wednesday downgraded Newark to A3 from A2, affecting $500 million of outstanding general obligation debt.

The outlook is negative.

The downgrade is due to historical structural imbalances, the city's limited liquidity, and the use of deficit financing, the rating agency said. Newark is New Jersey's largest city.

"The downgrade to A3 from A2 reflects the city's ongoing structural gap and narrow liquidity, which necessitated the use of deficit financing to close the fiscal 2010 (ending December 31) budget gap, increasing an already above-average debt burden," according to a Moody's report. "The city's narrow liquidity also necessitated cash flow borrowing for the first time in recent years."

Moody's also assigned a Baa1 rating to $42 million of Series 2010A lease revenue bonds and an A3 rating to $29.5 million of Series 2010B lease revenue bonds and $1.6 million of Series 2010C lease revenue bonds.

The Essex County Improvement Authority will sell the lease revenue general obligation bonds as a conduit issuer next week, according to Jim Paganelli, the authority's executive director.

The transaction includes the ECIA selling bonds in order to purchase city-owned assets. Newark will then lease those properties from the authority, with lease payments repaying the bonds.

The Series 2010A bonds have a lower credit rating because the bonds are a backed by Newark's limited taxing pledge, which is subject to a 2% property-tax increase limit. The Series 2010B and C bonds are secured by Newark's unlimited taxing pledge.

Newark will use $41.7 million of asset-sale proceeds to help balance the budget for fiscal 2010, which ends Dec. 31. The remaining $31.1 million will help finance upgrades to the leased properties.

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