(Reuters) - Moody's Investors Service cut the credit rating of Ferguson, Missouri to "junk" status on Thursday, citing its sharply deteriorating finances following the fatal shooting of a black teen by a white policeman in the city in August 2014.
The rating agency said the seven-notch downgrade of Ferguson's general obligation rating, to Ba1 from Aa3, was due to a "severe and rapid" financial deterioration that could lead to insolvency for the St. Louis suburb by the end of its fiscal 2017.
"Key drivers of this precipitous drop are declining key
revenues, unbudgeted expenditures, and escalating expenses related to ongoing litigation and the (U.S.) Department of Justice (DOJ) consent decree currently under negotiation," Moody's said in a statement.
A DOJ probe after the shooting death of Michael Brown found racially biased practices on the part of law enforcement. The shooting led to massive civil unrest in the mostly black city of 21,000.
In a June 24 fiscal 2016 budget message, Ferguson's Assistant City Manager Matthew Unrein said the city recognized it was in "perilous circumstances" and that continuation of the status quo would result in insolvency sometime in fiscal 2017.
Moody's noted that while Ferguson has not indicated any plans to file for municipal bankruptcy, local governments in Missouri can head to bankruptcy court without state approval.
The rating downgrade affects $6.7 million of the city's outstanding GO bonds. Moody's also dropped the ratings on nearly $10 million of certificates of participation to Ba2 and Ba3 from A1 and A2 and warned all the ratings were on review for potential further downgrades.
Moody's added Ferguson's ratings could be withdrawn completely if the city continues to fail to provide requested information on cash-flow projections, legal costs and insurance coverage for legal settlements.
Ferguson Mayor James Knowles took issue with the downgrade, calling it "unfair." He said Moody's asked for information the city could not provide at this time.
"It doesn't matter. We're not issuing any debt now," he said, adding the city's finances are solid for the time being.
(Reporting By Karen Pierog, additional reporting by Cary Gillam; Editing by Tom Brown)