Moody’s Investors Service last week assigned a negative outlook to A3-rated Trenton, affecting $371 million of outstanding parity debt.

City officials have yet to approve the budget for fiscal 2011, which ends June 30. Trenton, the state capital, must close a $12 million deficit this year.

Plans to fill the gap include spending reductions, such as implementing furlough days and wage freezes, and raising property taxes, according to Moody’s.

A large portion of Trenton’s operating budget relies upon state aid. New Jersey cut allocations to municipalities in its fiscal 2011 budget to help keep spending in line with revenue.

“The negative outlook reflects our belief that the city may be challenged by expected additional reductions in state aid,” Moody’s said in its report on Trenton’s fiscal situation.

“State financial support has historically been an important component of the city’s financial operations and we expect this revenue source to incrementally decline in the near term.”

The agency said it may downgrade Trenton if it is late in adopting its fiscal 2011 budget, fails to resolve its $12 million deficit, or does not address future reductions in state aid in a timely and adequate manner.

The city received $27 million in transitional aid this year, which helped Trenton reduce its current-year deficit to $12 million.

As the state capital, the city has a limited tax base, with 50% of its property non-taxable.

Trenton’s population is 83,242, according to the U.S. Census. The city’s unadjusted 12.7% unemployment rate in November compares with a 9% unadjusted statewide rate for the same month.

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