Moody’s Investors Service downgraded Waukegan’s rating to A1 from Aa3 and left a negative outlook on the city’s credit due to its fiscal challenges.

The action affects $93 million of general obligation debt, including $11.8 million of bonds selling this week to refund bond anticipation notes due next month.

“The downgrade and assignment of the A1 rating reflect a tax base with unemployment higher than state and national figures, operations which continue to face fiscal pressures, and average levels of debt with rapid amortization,” analysts wrote.

The city had a $4.2 million deficit last year because economically sensitive revenues were down. It also did not include police and fire department pension contributions of $2.9 million and $2.4 million, respectively, in the fiscal 2009 budget.

Management currently expects a general fund deficit of about $1 million in fiscal 2010.

Waukegan is located about 45 miles north of Chicago along the shore of Lake Michigan. While it is struggling with high local unemployment and relatively weak demographics, it benefits from serving as the seat for Lake County’s government.

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