Moody's Investors Service said it has downgraded to Baa2 from Baa1 the city of Paterson, N.J., and assigns Baa2 underlying and A1 enhanced rating in conjunction with $11.6 million general obligation refunding bonds, 2013, consisting of $7.9 million general improvement refunding bonds and $3.7 million pension refunding bonds (taxable).

The underlying Baa2 rating applies to $41.9 million of currently outstanding general obligation debt.

The outlook on the underlying rating remains negative and the outlook on the enhanced rating remains stable. Concurrently, Moody's has also downgraded to MIG3 from MIG2 $6.1 million special emergency notes (tax-exempt), 2012 outstanding.

The Baa2 rating reflects the city's depleted financial position with negative reserves net of deferred charges, narrow liquidity, declining state aid and an increased dependence on deferred charges. The rating also factors in the large tax base with weak socioeconomic indices, and manageable debt burden.

The negative outlook factors in Moody's belief that the city will be challenged to obtain structural balance and return to adequate reserve and cash levels in an environment of ongoing expenditure pressures resulting from employee salaries and benefits, reduced state aid revenues, a weak economic recovery and a 2% levy cap.

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