Detroit Public Schools Downgraded to B2 by Moody's

Moody's Investors Service said it has downgraded to B2 from B1 the issuer rating of Detroit Public Schools.

The outlook on the rating remains negative.

The downgrade to the B2 issuer rating primarily incorporates continued operational weaknesses driven by a steady and likely ongoing decline in enrollment. While the district's financial position improved in fiscal 2012, it did so through the issuance of deficit bonds that resulted in material growth in the district's direct debt burden.

In addition, as operating revenue continues to decline, the share of resources dedicated to debt service has grown and will likely increase further in the coming years. Operational results were weaker than expected in fiscal 2012 and may be negative in fiscal 2013.

The rating also incorporates the potentially stabilizing oversight of a state-appointed emergency manager and the economic and demographic weakness within the city of Detroit (GO rated Caa1/negative).

The maintenance of a negative outlook reflects the pressure that continued enrollment loss will likely exert on the district's operations. As revenues continue to fall, further expenditure adjustments will be necessary in order to reduce the deficit general fund balance.

Furthermore, a reduction in operating revenue will result in additional growth in the share of general fund resources dedicated to debt service.

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