“There’s a lot of negative drivers for this sector,” Moody’s analyst Hetty Chang says about Michigan school districts.

CHICAGO -- Moody's Investors Service has downgraded more than three dozen Michigan school districts this year as falling enrollment continues to strain their finances.

It's the third year that the ratings agency has warned of financial problems facing the state's schools. Michigan lawmakers have also started reacting to the problem, passing measures that range from early intervention to financial oversight.

Moody's as of Aug. 7 has downgraded 38 of the 225 Michigan school districts it rates, translating into 17% of its portfolio.

"There's a lot of negative drivers for this sector," said Moody's analyst Hetty Chang. "The biggest factor for Michigan schools is enrollment, which defines the vast majority of their revenues."

Unlike other states, Michigan's school funding formula is distributed entirely on a per-pupil basis. Districts are not allowed to go to voters to raise additional money.

"They just don't have the option. Even if voters wanted to approve it, it's not available," Chang said.

Enrollment declines lead to other pressures, said analyst Andrew Van Dyck Dobos. "As they have this loss of students, it's hard for districts to budget, so they're experiencing negative budget to actuals, and that's caused financial stress," Van Dyck Dobos said.

A rising number of Michigan districts has suffered from general fund deficits since 2011.

Falling enrollment, rising retirement costs and charter school competition all contribute to the problem, according to Moody's and Michigan officials. The state currently has more than 50 districts, out of a total of 550, that carry deficits, according to the state education department.

Public school enrollment throughout the state dwindled 12% in the last decade, according to Michigan Department of Education data, continuing a trend of decline that reaches back at least to the late 1970s.

Moody's also downgraded a significant number of Michigan schools in the past two years. In 2013 the ratings agency downgraded 53 districts through November, representing 22% of its portfolio.

Lawmakers in the past year have passed a series of bills aimed at boosting the state's powers to deal with distressed districts.

Gov. Rick Snyder in July signed into a law a package of bills that, among other things, created an early warning system for districts, gives the state treasurer the power to recommend an emergency manager take over a district, and shifts oversight of districts with deficit elimination plans to the treasurer from the state education superintendent.

The Junk-bond rated Detroit Public Schools remains the state's most troubled district, now in its seventh year of state control. Snyder in the spring proposed a plan to divide the district in two, with one district to take over debt payments and a 'new company' to take over all educational duties. Lawmakers are expected to take up the legislation this fall. Pension costs bring additional pressure, Van Dyck Dobos said.

The state's districts participate in the Michigan Public School Employees Retirement Plan, sharing the costs of the system. While the per-pupil foundation formula has remained relatively flat in recent years, the costs of pensions have gone up. "A lot of the funding has been diverted to pensions rather than going to the students," Van Dyck Dobos said.

Southeast Michigan, and the Detroit area in particular, has a high number of charter schools that have siphoned off students from traditional public schools. Detroit has the highest amount of charters per student of any city in the country. The charter-growth trend may be slowing somewhat, said Van Dyck Dobos, and that could be a bright spot in the sector.

"We have seen a slowdown in the growth of charters, and maybe that's a saturated market in southeast Michigan, so that may lead to more stabilization within enrollment," he said.

Moody's this year has upgraded only one Michigan district - Oak Park, in the metro Detroit region, lifting the rating to Baa2 from Baa3, saying it has seen an increase in students, many from Detroit. If other upgrades come, it will likely be districts that are stabilizing but ratings will still likely remain below their historic category, according to Van Dyck Dobos.

"Upgrades that may occur in the future could likely be those districts who fell below their natural rating and showed some signs of recovery but are still lower than what they had been in the mid-2000s," he said.

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