NEW YORK - Moody's Investors Service said it downgraded to A2 from A1 the rating on the city of Vermilion, Ohio's outstanding general obligation limited tax debt and assigns a negative outlook.

Concurrently, Moody's has assigned an A2 rating with a negative outlook to the city of Vermilion's $610,000 general obligation (limited tax) water system improvement refunding bonds, Series 2012. The A2 rating applies to a total of $11.0 million of Moody's-rated general obligation debt. Post-sale, the city will have $11.7 million in GOLT debt outstanding.

The bonds are secured by the city's general obligation limited tax pledge, subject to the 10.75 mill charter limitation. Bond proceeds will be used to refund a portion of the city's outstanding water system improvement bonds, Series 1995 and extends final maturity to 2027 in order to alleviate pressure on the city's limited cash reserves.

The downgrade to the A2 rating reflects the city's structural imbalance that has led to narrow reserve levels and expected drawdown of General Fund reserves in fiscal 2012; moderately sized tax base located 40 miles west of Cleveland (general obligation rated A1 with stable outlook) and average debt burden with limited additional borrowing planned in the near-term.

The negative outlook reflects expectations for a decline in 2012 of already limited general fund reserves as well as limited liquidity in the general fund, enterprise funds and the internal service fund, placing additional pressure on the city's finances.

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