OREANDA-NEWS. S&P Global Ratings lowered its ratings on East Peoria, Ill.'s outstanding general obligation (GO) debt to 'A+' from 'AA-'. We also assigned our 'A+' long-term rating to the city's series 2016C taxable GO refunding bonds (alternate revenue source). The outlook is negative.

"The downgrade reflects our view of the worsening of several credit factors over the past few years, the combination of which we consider significant enough to warrant a lower rating," said S&P Global Ratings credit analyst Scott Nees. In summary, these include the city's: Elevated pension costs that have risen materially in recent years;Low pension and other postemployment benefit (OPEB) plan funding ratios and very large and growing unfunded liabilities;Decline in available reserves to levels that, while still very strong at the conclusion of the most recently audited fiscal year, are about half what they were as a share of general fund expenditures at our previous review; Revised financial management assessment (FMA) scoring to "standard" from "good"; andUncertainty regarding the future stability of its top employer, Caterpillar Inc., which we understand is in the process of restructuring its worldwide operations, though to our knowledge, no significant downsizing has been announced in East Peoria. Officials will use 2016C bond proceeds to advance refund outstanding debt for interest cost savings. The bonds are secured by tax-increment revenues derived from the city's Camp Street Redevelopment Project Area, gaming taxes, and, to the extent these are insufficient, by ad valorem property taxes against all taxable property in the city without limitation as to rate or amount. Though secured by several revenue streams, we rate the bonds under our local government GO criteria. The city has a number of other alternate revenue source bonds outstanding the ratings on which we are affirming as part of the present rating action. In each case, we rate to the GO pledge, and in each case, the bonds have a covered abatement.

East Peoria, with an estimated population of 23,270, is in central Illinois' Tazewell County adjacent to Peoria, roughly 170 miles southwest of Chicago and 160 miles northeast of St. Louis.

"The negative outlook reflects our view that there is at least a one-in-three chance of a lower rating within the next two years," added Mr. Nees. We could lower the rating if the city's budgetary performance weakens and if reserves continue to weaken, particularly if the operating budget shows symptoms of an unaddressed structural imbalance in the next two years.

In addition, while not an immediate concern, downside pressure could grow if Caterpillar's restructuring were to weaken the local economy and if combined fixed costs between the city's debt and pension and OPEB burden were to continue to escalate in a way that we believed was unsustainable. Conversely, we could revise the outlook to stable if the city can adequately demonstrate that it will consistently sustain at least adequate budgetary performance and strong or very strong reserves.