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Moody's Keeps Michigan Schools On Negative Outlook, Challenges Persist

CHICAGO — Moody’s Investors Service said Tuesday it is maintaining its negative outlook on Michigan’s school districts — with more downgrades expected — due to ongoing challenges from “unprecedented stress” over the last few years, primarily from falling enrollment and state aid.

Moody’s has downgraded nearly a quarter of the 239 Michigan school district it rates since January 2009, the ratings agency said in the outlook report, “Michigan School Districts Under Pressure: Outlook Remains Negative.”

The number of downgrades has risen every year, and downgrades of Michigan school districts is at least three times greater than the sector’s share of U.S. school district ratings, according to analyst Matthew Butler, who wrote the report.

“The number of downgrades has accelerated as declining revenues have resulted in steady weakening of many district’s financial positions,” Butler said in the report. “Given limited flexibility to close budget gaps, further rating downgrades are expected going forward. Districts most likely to preserve credit quality are those that have benefited from greater enrollment stability, as well as a capacity and commitment to control expenditures and maintain satisfactory financial reserves.”

Moody’s noted that most of the state’s most strapped districts are located in the southeast region around Detroit. These districts have seen the biggest enrollment declines — driven largely by a larger population decline — and are pressured by larger economic problems like high unemployment.

Of the 14 school districts rated Baa1 and below, all but one are located in the southeast section of the state, and nine are located in the Detroit metro area. 

Part of the problem in Detroit is competition from the high number of charter schools, analysts said. More than 250 public charter schools operate in Michigan, the majority around Detroit. The city has the second-largest concentration of charter schools in the nation, and an estimated 41% of Detroit’s students attended a charter school in the 2011-2012 school year, Moody’s said.

“In light of this competitive environment, significant enrollment losses can be difficult for a school district to manage, potentially creating a vicious cycle of revenue declines and budget pressures,” Butler said.

The report came out the same week that Gov. Rick Snyder unveiled a draft overhaul of the state’s school funding formula. The Michigan Public Education Finance Act, drafted at the governor’s request by the Oxford Foundation-Michigan, proposes that students be allowed to take classes at any public school in the state, even online, and that the all-important per-pupil funding would follow the school instead of staying in the district.

Critics immediately said the plan would devastate urban school districts already struggling with enrollment declines and competition from charter schools, like Detroit. Snyder plans to present a final proposal in his February budget speech.

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