Moody’s Investors Service this week downgraded to Ba2 from Baa3 the underlying rating on $7.9 million of outstanding school building and site improvement bonds issued by the Detroit Public Schools in 1996.

The downgrade to below investment grade comes several weeks after Michigan declared DPS to be in a state of fiscal emergency and appointed a manager to take over its finances. The district faces a $400 million deficit under a $1.1 billion annual budget.

The state’s largest school district, DPS had about $1.67 billion of outstanding debt as of fiscal 2006. The bonds that Moody’s downgraded this week are the district’s only GO debt with an underlying rating from Moody’s, the agency said. The rest of DPS’ debt is rated A1 or Aa3 based on the state’s rating through a school credit-enhancement program.

The 1996 bonds are set to mature in 2011 and are secured by the district’s GO unlimited-tax pledge.

The downgrade reflects the district’s limited revenue-raising flexibility, as well as enrollment declines and limited financial information, Moody’s said. DPS also has a balance sheet weakened by previously issued deficit-elimination bonds.

The agency said its stable outlook partly reflects Michigan’s assignment of an emergency fiscal manager. “The stable outlook also reflects our expectation that the district’s credit quality will neither significantly improve nor significantly deteriorate in the near term, remaining consistent with the quality of the current rating,” Moody’s said.

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