Moody's Investors Service cut its rating on the fiscally troubled city of Mansfield by two notches to A3 from A1 and placed the credit on review for a further downgrade. The move affects $12.7 million of general obligation debt.

The state of Ohio declared Mansfield to be in a state of fiscal emergency in 2010. Moody's said the downgrade reflects the city's fiscal deficit position and ongoing economic pressures.

The review for a further downgrade comes before the evaluation and implementation of a state-mandated fiscal emergency recovery plan. The plan, which is being crafted by city officials and the state-mandated Fiscal Emergency Supervision Commission, is expected to be complete by the end of February 2011.

Mansfield, the county seat of Richland County, has suffered general fund shortfalls since fiscal 2007, Moody's said. The city has also seen chronic deficits in its safety services fund, which is twice as large as the general fund and accounts for 76% of operating expenses.

The city relies heavily on economically sensitive income-tax revenue for its safety services and general funds. Like many Ohio governments, Mansfield has grappled with steep declines in its income-tax revenue as well as other important revenue streams over the past few years.

In an attempt to stabilize its fiscal position, Mansfield officials have implemented a series of budget cuts and layoffs. They said they expect to end fiscal 2010 with a deficit position that is equal to fiscal 2009.

Additional layoffs by the end of December and the implementation of the recovery plan are expected to help balance the fiscal 2011 budget.

But Moody's said the government will continue to face fiscal pressures. "Even with a successful implementation of the city's recovery plan, we expect it will take considerable time to rebuild reserves to adequate levels given ongoing pressures in major revenue streams," analysts wrote in a recent report.

On the debt side, Mansfield has a modest debt burden and no additional borrowing plans, analysts said. Nearly 90% of its debt is scheduled to be repaid with the next 10 years under an aggressive amortization plan. All of the city's bonds are in fixed-rate mode.

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