Newark Mayor Ras Baraka has confronted financial challenges since taking office in July 2014.

Newark, N.J.'s general obligation unlimited tax rating is sitting just above junk territory after Moody's Investors Service downgraded New Jersey's largest city two notches to Baa3 with a negative outlook late Friday citing uncertainties of a timely balanced fiscal 2015 budget.

Moody's said the lowering of Newark's senior-most debt reflects the city's negative fund balance and a reliance on market access for cash flow. The downgrade impacts $374 million of GO unlimited tax bonds.

Newark's limited tax GO bonds are now at junk, as Moody's dropped them two notches to Ba1 from Baa2, affecting $39 million in bonds. In addition, Moody's assigned an underlying Baa3 rating and enhanced A3 rating with negative outlooks to $56.7 million in GO Bonds that Newark plans to issue.

"The downgrade to Baa3 reflects the city's further weakened financial position since last year, with negative fund balance and negative net cash," Moody's analysts said in the May 15 report. "The negative outlook reflects uncertainties surrounding the timely adoption of a balanced fiscal 2015 budget and adequate collection of the city's various revenues."

The downgrade took into account Newark's history of "aggressively structured budgets" often adopted late in the year and uncertainty surrounding future financial support from the state government, which is rated A2 with a negative outlook. The analysts point out that positives in favor of Newark include a large growing tax base, high daytime employment and numerous development projects underway.

Responding to the downgrade, Newark Business Administrator Jack Kelly said Mayor Ras Baraka had only been in office less than eight months when Moody's requested a credit review and the city's "weakened financial position" stems from prior administrations.

Kelly said the majority of the city's previous year-ending deficits were caused by overestimating revenues to close budget gaps. He added that the 2015 budget will be presented to the City Council at the end of May -- its earliest in more than a decade-- and will be balanced with only verifiable revenue included.

"New revenues such as the proposed 'container fee' will be aggressively pursued, along with auditing certain special taxes such as parking tax revenue," said Kelly. "Additionally the City is working closely with the State Division of Taxation and the Governor's office assessing how the State Division of Taxation may assist the City in the collection of the City's annual employer payroll tax of $42 million."

Newark was among seven distressed New Jersey municipalities Moody's placed on review for a possible downgrade in mid-March due to a heightened risk of state aid cuts. Other cities downgraded since that review started include Trenton, Paterson, Union City, Kearny and Asbury Park. The town of Weehawken had its credit rating maintained.

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