CHICAGO — Omaha lost one of its prized triple-A ratings Friday when Moody’s Investors Service dropped the Nebraska city to Aa1 due to mounting employee retirement liabilities.

The downgrade came a day ahead of the city’s sale Monday of $59 million of general obligation bonds. Standard & Poor’s maintains its AAA rating on the city. Fitch Ratings does not rate Omaha’s debt.

“The downgrade of the rating to Aa1 is primarily based on persistent under-funding of its pension obligations, which is not consistent with the expected financial practices of highly rated cities,” Moody’s analyst Tatiana Killen wrote in a ratings report released Friday. “The city also faces challenges to incorporate modifications to bargaining unit contracts in an effort to address significant reform of the unfunded pension obligations.”

The city’s unfunded pension  liability was $742 million as of Jan. 1, 2011. The bulk of that, $610 million, comes from the city’s police and fire pension system, with the rest in the city’s civilian pension fund. Omaha’s other post employment benefit liability is $478 million, according to Moody’s.

Omaha recently reached agreements with its police union that increases employee and city pension contributions by 13.5% each, Moody’s said. The city will finance its payment with revenues from a 2.5% bar and restaurant occupation tax. The city is still negotiating with the firefighters’ union, and those negotiations are winding their way through the court system.

Despite increased contributions, the city will achieve a fully funded status only after 45 years, according to Moody’s.

Omaha Mayor Jim Suttle, who has proposed several tax increases to address the retirement costs, called the Moody’s downgrade a “devastating blow for the taxpayers.”

“We are unhappy with the rating but it didn’t come as a total surprise considering the fact that we have an unresolved pension shortfall,” Suttle said in a statement. “I hope this will strengthen the resolve of all parties to make solving the unfunded pension liability the top priority in labor negotiations.”

Anchoring the city’s ratings is a stable, diverse economy that enjoys a low unemployment rate of 4.6%, as well as a history of strong financial management, Moody’s said.

City Comptroller Al Herink said the city is working with unions to resolve the problems. “It’s a long-term process,” Herink said. He added that the city’s Aa1-rated bonds are still “very marketable.”

D.A. Davidson & Co. was the senior manager Monday for the $59.2 million sale. The borrowing included two series of serial bonds and term bonds maturing in 2026, 2027, and 2028. Yields ranged from 0.3% to 3.06%, with an all-in total interest cost of 2.264%, according to Dan Smith at D.A. Davidson. Smith said the bank had “good reception” from insurance companies, money manager, and trust accounts. “We were very pleased and so was the city,” he said of the sale results.

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