Moody’s Investors Service announced Thursday it has downgraded the rating of the certificates of participation for Santa Ana’s 1998 City Hall expansion project, reflecting what the credit rating agency says is the city’s weakening financial position.

The two-notch downgrade — from A2 to Baa1 — follows another Moody’s downgrade on the same project a year ago. The Baa1 rating, considered a medium investment grade, is three notches away from junk-bond status.

The certificates of participation give investors shares of the $9.5 million left on the expansion project lease. The Moody’s downgrade is the latest in a string of revelations that show the city’s rapidly deteriorating financial picture.

“We [Moody’s] believe credit quality is likely to deteriorate further before the city is able to restore balance to its budget and replenish reserves,” read a Moody’s report on the downgrade.

The report puts particular emphasis on the city’s nearly $30-million deficit. The report does, however, credit the city for hiring financial consultant Management Partners Inc. to conduct a budget study.

Nonetheless, the report questions interim City Manager Paul Walters’ preliminary budget stabilization plan, a mix of revenue increases and cost-cutting measures like outsourcing city services.

“Although these are positive steps, the actual measures outlined in the city manager’s report are likely to prove to be difficult to achieve in the short-term,” says the report.

The report also cites the city’s depleted unrestricted general fund balance and raids on city internal service funds to balance the budget in recent years. According to the report, there is $52 million left in the internal service funds but only $25 million can be transferred permanently to balance the budget.

The Management Partners report specifically states that some of these internal accounts are already underfunded because of previous transfers.

The rating downgrade comes as Santa Ana residents are expressing increased anxiety about their city’s budget situation.

A group of about 30 city residents and officials of Latino Health Access, a nonprofit offering health access programs throughout Orange County’s central core, grilled Walters on the city’s budget crisis during a meeting this week at the organization’s offices.

Attendees, armed with hard facts about the budget, were clearly frustrated by the lack of youth programs, little open space and the rising costs of public safety.

“What about salary cuts for police and firefighters all the way down?” asked city resident Alfonso Olivos. More than 800 city employees — mostly in public safety — made more than $100,000 in total compensation in 2010.

The Moody’s report acknowledges that the city has few places left to cut other than public safety.

State Sen. Lou Correa also attended the meeting and gave Walters some advice for bringing revenue into the city: Stop overregulating businesses.

“We’ve got to stop acting like the prettiest lady on the block and instead try to get the boys from other states to visit,” Correa said.

Correa also asked Walters to keep the libraries open. “I would like to ask you to continue focusing on those cost-effective things that keep the kids busy,” he said.

Councilwoman Michele Martinez, the only city official who could be immediately reached for comment, said she would be asking the city’s finance director about the downgrade and the “big picture.”

“Is that something that typically happens in a market like this, an economy like this?” Martinez asked.


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