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LOCKPORT – Moody’s Investors Service, one of the big three Wall Street bond rating firms, has cut the City of Lockport’s credit rating to the lowest investment grade, with more reductions to be considered.

Friday’s announcement likely will lead to increased interest costs for the deficit financing the state has recommended for Lockport, City Treasurer Michael E. White said Monday.

Mayor Anne E. McCaffrey said she does not have a projection available on how much the borrowing of up to $5.35 million for 10 years will cost the city to repay.

Once Gov. Andrew M. Cuomo signs the bill authorizing borrowing to pay off the city’s accumulated deficits, a move he has not yet made, the State Comptroller’s Office will choose the exact amount the city will be allowed to borrow. McCaffrey said that calculation won’t happen until after the bill is signed.

The downgrade announced by Moody’s comes on the heels of a severely critical state audit of the city’s cash flow, or lack thereof. The audit last week projected the city will run out of money next month without the deficit financing.

David Jacobson, a spokesman for Moody’s, said the decision, based on the state audit and the city’s still-unaudited 2013 financial results, could be the basis for more reductions in the city’s credit rating when its deficit bonds come up for review.

“It remains under review for a further downgrade,” Jacobson said.

White said the downgrade, which followed a reduction in the city’s credit rating June 27 by another Wall Street firm, Standard and Poor’s, “is to be expected given our cash flow problem.”

Generally, the lower a municipality’s credit rating, the higher the interest it must pay to borrow money.

Jacobson said Friday’s reduction cut Lockport’s rating from A2, its highest ever on the Moody’s scale, to Baa3, which is four notches lower. Anything lower is rated as noninvestment grade debt, sometimes called “junk bonds,” which carry higher interest rates for the borrower and more potential income for the investor who assumes the risk of default.

“We had not made a rating change since 2004,” Jacobson said.

Friday’s downgrade pertained specifically to an upcoming interest payment for a bond the city issued in 2005. That was a 15-year bond sold for $2.8 million at 3.75 percent interest, which was used to pay for construction at the city water filtration and composting plants, the purchase of highway equipment and replacement of sewer lines.

The city still owes $765,000 on that bond, and a $57,000 interest payment is due Sept. 1. The Moody’s report says the city has assured them it will be able to make that payment.

“That’s one of our main priorities. We’ve never been late for anything and we never will be,” White vowed.

He said he had confirmed that the reduction in the rating would not increase the interest payments on existing debt.

McCaffrey said the city’s credit rating will improve when the city’s finances improve.

The city has $16.6 million in outstanding debt, of which $9.8 million counts toward the city’s constitutional debt limit. That limit is $49,687,180, which is 7 percent of the average of the last five years of the city’s total full-value assessed valuation.

White said borrowing for water and sewer projects doesn’t count toward the cap, nor do revenue anticipation notes such as the $2.7 million in emergency short-term borrowing the Common Council approved in October to get the city through 2013 without running out of money.

McCaffrey said last week that the city would use that device again if Cuomo fails to sign the deficit financing bill.

email: tprohaska@buffnews.com