SAN FRANCISCO - Standard & Poor's downgraded Sacramento two notches late Monday, saying the city has a structurally imbalanced budget and no clear plan to close the gap in the near future.

The agency cut the city's issuer credit rating to A-plus from AA and dropped the rating on its lease revenue bonds, issued by the Sacramento City Financing Authority, to A from AA-minus. The outlook on the debt is stable. The downgrade affects about $521 million of general fund-backed debt.

"Although management has already implemented many cost-saving measures - and has proposed more for 2010 - it is our understanding from management that achieving structural balance will be a multi-year process and that budget gaps will likely persist beyond fiscal 2010," said Standard & Poor's analyst Paul Dyson in a report.

Sacramento, California's seventh-largest city, has been hit hard by the housing downturn. It expects property tax revenues to fall 6% in the upcoming fiscal year, while sales taxes are forecast to fall 2.5%.

The City Council earlier this month passed a 2009-2010 budget that closed a projected $50 million general fund current-services budget deficit with about $41 million of spending cuts and about $9 million of one-time reserve spending.

That follows what Standard & Poor's called a "substantial" drawdown of Sacramento's reserves in the current fiscal year, when officials spent $31.6 million from reserves as they closed an unanticipated mid-year budget deficit of $58 million. The city drew down its economic uncertainty reserves to $10.5 million, or 2.7% of expenditures.

Sacramento plans to maintain those reserves in the upcoming budget year, said Treasurer Russell Fehr. He said the City Council made difficult decisions to close the deficit for the upcoming budget year, including issuing hundreds of layoff notices and freezing salaries for many workers. The fiscal 2009-10 budget also relies less on reserves than the previous two budgets.

"We have a realistic balanced budget," Fehr said. "We have very conservative revenue estimates."

Fehr didn't dispute that Sacramento faces difficult budget challenges, but he said the city is conservatively managed and a low default risk, adding that Standard & Poor's stable outlook seemed at odds with the two-notch downgrade.

But the rating agency said the city still has a structural budget deficit that needs to be addressed.

"Overall, the current level of general fund commitments indicates a cumulative deficit of $102 million over the next four fiscal years if further expenditure cuts are not made in fiscal 2011," Dyson said.

"The city's budget sustainability and fiscal capacity will hinge on its ability to make further expenditure reductions in fiscal 2011 and beyond, given rising labor costs, increased costs to make up for investment losses in the city's retirement funds, and the cost to bring new facilities online," he said.

Sacramento is rated Aa3 by Moody's Investors Service. It is not rated by Fitch Ratings.

Fehr said Sacramento has no plans to issue additional debt over the next two years, but it may issue recovery zone bonds allocated under the American Recovery and Reinvestment Act. He said those bonds probably would not be backed by the general fund.

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