More than 50 school districts across Michigan have had their credit ratings downgraded by Moody’s Investors Service this year, a trend that will hit districts directly in the pocketbook if they need to borrow money.
Moody’s released a report today showing 53 school districts had their ratings downgraded through October — 64% more downgrades than in all of 2012. Among the districts: the Pontiac School District, which has been downgraded twice this year, Detroit Public Schools, Grosse Pointe Public Schools and the Avondale School District.
■ PDF: Read the Moody’s report
Two more districts were downgraded in November. Rating downgrades can have an adverse impact on school districts, costing them more if they need to borrow money.
Contributing heavily to the financial pressures are enrollment declines, limited flexibility to raise revenue to offset state funding losses from those enrollment declines, and a growing diversion of revenue toward retirement costs. For some districts — including Detroit —the growth of charter schools is also having a key impact. In the city, charters had 41% of the enrollment during the 2011-12 school year, Moody’s said.
“There is little sign that the credit pressures facing Michigan schools will ease in the coming year,” the agency said in the report.
In Michigan, about 50 school districts are operating in a deficit. Two districts — Buena Vista and Inkster — were dissolved this summer because of longstanding financial problems. They were not on the list, however.
In Livonia Public Schools, revenue has declined by $20 million to $30 million in the past five to six years, said Superintendent Randy Liepa, whose district was downgraded in June — going from a Aa3 rating to an A1 rating, a drop of one notch.
“We’ve been able to maintain our programs by and large. … But something is going to have to be addressed for school districts across Michigan,” Liepa said. “We can only continue to survive for so long in that kind of environment.”
Liepa said it would help if the state restored extra funding to offset losses for districts experiencing enrollment declines. The Moody’s report said that 425 of 549 districts experienced enrollment declines from 2004-12.
The Grosse Pointe district saw its rating downgraded one notch — from Aa1 to Aa2 — in late August because the amount of money stored away in its rainy day fund dipped to 2% of total revenue, said Christian Fenton, deputy superintendent. That’s expected to change, though, because employee contracts now include a provision that salaries and benefits would be reduced if that rainy day fund dips to certain levels.
Still, the downgrade could have a slight impact the district if it goes to voters in February with a $51-million bond proposal to upgrade technology. The board of education is to vote Monday on whether to put that proposal on the ballot.
“Technically, it should raise interest rates just a pitch, but we won’t really know until we get out to market,” Fenton said. He said it could be a difference of getting an interest rate of 3% under the old rating to an interest rate of 3.05% to 3.1% under the new rating.
The Avondale district in Oakland County was downgraded in February, from an A2 rating to a Baa1 rating — a drop of three notches. But Superintendent George Heitsch said things are turning around. Standard & Poor’s recently upgraded the district’s rating. And after seven years operating in a deficit, Heitsch said the district will soon be operating in the black.
“We think the fact that we’re coming out of deficit and we’re stable on the enrollment end gives us the opportunity to keep improving that rating,” Heitsch said.
Courtesy of The Detroit Free Press