SAN FRANCISCO — Standard & Poor’s said it has dropped the underlying rating on two Stockton water revenue bonds by three notches to BB-plus amid a looming default as the California city considers bankruptcy.

The agency said it lowered the ratings on the Stockton Public Financing Authority’s Series 2005A water revenue bonds and Series 2010A variable-rate water revenue bonds due in part to the uncertainty about Stockton’s pre-bankruptcy talks with creditors and its potential filing for Chapter 9 protection.

The outlook on all of the bonds is “developing.”

Stockton, a city of 300,000 in the Central Valley, has been struggling with budget woes caused by a steep drop in tax collections due to the recession. The city took on debt to support wide-ranging projects and handed out rich retirement packages to employees before the bottom fell out of the housing boom.

The Stockton City Council will consider Tuesday giving its city manager the power to declare bankruptcy if its current mediation with its creditors fails. The city started the confidential deliberations in March, and then had them extended until June 25, under a new state law meant to try to keep municipalities from filing for Chapter 9 protection.

Standard & Poor’s also lowered the long-term rating two notches on the authority’s two subordinate series of bonds issued in 2009 to BB-plus from BBB.

S&P lowered the long-term rating on the authority’s 2010 variable-rate water revenue bonds to AA-minus. The bonds are backed by a letter of credit from Union Bank NA.

Union Bank previously said the bonds were in default according to the agreement with the city; however, it said it does not have plans at the moment to cause a mandatory tender of the bonds, according to S&P.

“The rating actions reflect our view of several credit risks facing the city’s water enterprise, including, primarily the potential for an acceleration of principal payments for the series 2010A variable rate bonds,” analyst Paul Dyson said.

The credit rater cut the authority’s Series 2005A water revenue bonds to BBB from BBB-plus, noting they are insured by National Public Finance Guarantee Corp.

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