WASHINGTON, Jan 18 (Reuters Legal) - Moody's Investors Service cut its ratings on Tuesday on parking authority debt issued by the troubled Pennsylvania capital of Harrisburg to reflect a "substantial credit risk."

Moody's lowered the rating on $16.28 million of bonds sold in 2007 by the Harrisburg Parking Authority to Ba3 from Baa2. At that level, the debt is considered to have "speculative elements" according to Moody's scale.

The city is currently creating a recovery plan for its debt crisis which was triggered by costly overruns on its trash incinerator. Moody's said there was a risk the parking authority's assets could be transferred to the city as part of that plan.

The credit ratings agency noted that Harrisburg filed last month to be part of a Pennsylvania program that helps distressed cities pay their bills, adding it "continues to explore a bankruptcy filing under Chapter 9."

The authority's structure allows it to convey its property to other government agencies, Moody's said. That is an option the authority could very likely pursue because the Harrisburg mayor appoints authority board members and can have a "high level of influence over authority operations and management," Moody's said.

It added that "the city's recent non-payment of ... debt related to the Harrisburg Authority's failing incinerator" casts doubt on the city's ability to make payments on other bonds.

"We believe the possibility for the city to take possession and utilize authority assets exists, which could be detrimental to parking authority bondholders," Moody's said.

The Harrisburg City Council in November retained New York's Cravath, Swaine & Moore on a pro bono basis to advise it on its application for "distressed city" status and a possible bankruptcy filing. In a press release Cravath described the representation as "one of its most significant public service commitments in years."

Cravath partners Richard Levin and Paul Zumbro are leading the representation of Harrisburg.

(Reporting by Lisa Lambert of Reuters; Additional reporting by Terry Baynes and Jeff Roberts of Reuters Legal)