Fitch Ratings revised its outlook to stable from negative on Cleveland Municipal School District’s $147 million of outstanding general obligation debt while affirming its BBB-plus rating.

The revised outlook reflects the school system’s restored reserve levels and Fitch’s expectation that conservative fiscal management will help the district cope with a slew of challenges on the horizon.

Included among those challenges is an expected decline in enrollment that could negatively impact finances starting in 2009 when an Ohio funding formula guaranteeing a minimum level of support expires.

The district serves Cleveland as well as a few surrounding communities and includes more than 100 schools. Its fiscal profile has improved over the last several years and at the end of 2007 its unreserved fund balance totaled $31.5 million. But Fitch warned that the district relies heavily on state funding, which made up 64.5% of its general fund revenues in 2007. Between 2002 and 2007 enrollment declined 26%, due in part to declining population in the city as well as stepped-up competition from charter schools.

Despite the challenges, Fitch said it expects the district to maintain a stable fiscal position. “The outlook revision to stable reflects CMSD’s ability to restore reserve levels in recent years,” analyst Eric Kim wrote.

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