CHICAGO -- Cincinnati was downgraded two notches by Standard & Poor's, to AA-minus from AA-plus, on concern over its budget and high debt and liabilities.
The firm also lowered the city's non-tax revenue bonds to A-plus from AA.
The outlook is stable at the lower rating.
The March 28 downgrade comes as Cincinnati prepares to come to market with new-money and refunding general obligation bonds. Proceeds from the deal will be used to finance various capital improvements. The city also plans to advance refund some of its outstanding taxable police and fire pension bonds originally issued in 2005 for interest-rate savings.
"The AA-minus ratings on the city's GO bonds reflect our assessment of the city's weak budgetary performance and very weak debt and liabilities profile," analyst Caroline West said in a statement.
Cincinnati is struggling with a major pension liability that is estimated at $862 million. The Cincinnati Retirement System is only 61% funded.
Moody's Investors Service last July downgraded the city's GO rating to Aa2 from Aa1, largely due to the pension debt.
Mayor John Cranley plans for the city to negotiate cuts with its retirees and employees in federal court as part of a binding consent agreement.
"The current downgrading was due to choices previous councils and administrations have made with their spending priorities," Cranley, a public finance attorney who took office last November, said in a statement. "There was nothing we could do to avoid it, but it could've been worse. If we had done nothing, we would have gone down three or four grades. Standard & Poor's has recognized we have stabilized the situation."
An upgrade is possible if the city implements planned reforms and the budget improves.
"Although the projected fiscal 2014 results indicate a reduction in budgetary flexibility and weak budgetary performance, given that management has a credible strategy to implementing a structurally balanced budget in the short term and addressing the city's large pension liability over time, we do not believe the rating will be pressured over the two-year outlook performance," West said in the release.
On the bright side, the city has strong budgetary flexibility, very strong liquidity, and strong management, Standard & Poor's said.
