Moody's Investors Service said it has downgraded the ratings for Elkhart Community Schools, Ind., to Aa3 from Aa2 for their $35.6 million pre-circuit breaker general obligation debt outstanding, and to A1 from Aa3 for the district's $39.5 million post-circuit breaker debt outstanding.

The negative outlook was affirmed.

The city has an additional $29.9 million of general obligation debt outstanding that is not rated by Moody's.

The pre-circuit breaker general obligation bonds are secured by an unlimited tax pledge of the district, while the post-circuit breaker general obligation bonds are secured by a limited tax pledge of the district subject to Indiana's 2008 circuit breaker legislation.

The first mortgage bonds are obligations of the Elkhart Community School Building Corporation payable from lease rental payments made by the school district. Lease payments are payable from the levy of ad valorem property taxes on all taxable property within the school corporation and are rated on par with the district's general obligation bonds.

The downgrade to Aa3 on the pre-circuit breaker and A1 on the post circuit-breaker debt reflects the district's continued deficit operations that have led to an audited deficit cash position in the general fund at fiscal year-end, and the very limited revenue raising flexibility caused by circuit breaker legislation and the fully state aid funded general fund.

Also incorporated into the ratings are the district's relatively modest financial position on a calendar year-end and additional liquidity provided by a sizeable rainy day fund, the district's below average socio-economic profile, declining tax base valuations, and moderate debt profile.

The affirmation of the negative outlook reflects Moody's expectations for continued pressure on the district's ability to achieve structurally balanced operations given its limited budgetary flexibility, and continued uncertainty regarding the impact of any potential state funding cuts on the district.

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