NEW YORK - Fitch Ratings said it affirmed at BBB-plus Cleveland Municipal School District (CMSD), Ohio's $150.3 million general obligation (GO) bonds, series 2002 and 2004, and revised the rating outlook to negative from stable.
The negative outlook reflects the district's weakened financial position and the need for significant changes to align spending with available revenues. With a lack of voter support for operating levies and few other options to increase revenue, the district must make meaningful expenditure adjustments. The district is currently negotiating bargaining unit contracts, which will be crucial to its ability to reduce spending.
General fund reserves were minimal in 2009 and are expected to be nil in 2010. The district has approved and will implement a transformation plan which includes spending cuts, including a sizeable number of school closures; this and other actions will be necessary to restore fiscal balance in 2011 and beyond.
Enrollment continues to decline at a fast pace. State revenues, however, have continued to grow and the state's new funding formula beginning in 2010 is expected to at least maintain current revenues.
The economy in Cleveland remains challenging but consistent with historical performance.
The district's debt profile is favorable: the rated issuance is unlimited tax debt; overall debt ratios are low with no sizeable planned borrowings; and pension and retiree health care benefits are handled through the state, a credit strength for Ohio school districts.
A downgrade may result from a combination of one or more of the following: failure to achieve a favorable outcome with bargaining units to make meaningful spending cuts; lack of progress on the transformation plan; and or lack of stabilization and little improvement in financial position.
