Moody's Investors Service Tuesday downgraded Stockton's issuer rating to Baa1 from A3 as the city's fragile budget continues to face challenges.

"The downgrade and negative rating outlook reflect the fact that the city's precarious financial position is being severely challenged by recent events," Moody's said in the report. "These events threaten to increase general fund costs to levels beyond what the city's carefully balanced budget could afford."

Moody's did not specify the events.

The city's rating has now fallen three notches since starting the year at A1 before being cut to A3 in January.

Additionally, the agency cut the city's taxable pension obligation bonds to Baa2 from Baa1 and lease revenue bonds to Baa3 from Baa2.

Stockton's finances have been severely strained from a steep drop in revenues stemming from the housing bust, while labor costs locked into contracts continue to rise.

Stockton is the seat of San Joaquin County in California's Central Valley. It has a population of 290,400 and is the county's largest city.

It has an unemployment rate of 15.4%, compared to 11.9% for California as a whole.

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