Fitch Ratings downgraded the Philadelphia School District's underlying rating to BB-minus from BB Tuesday, citing its deteriorating finances and exodus of its students to charter schools.
Fitch maintained a negative outlook on the rating. The downgrade affects $3.1 billion in debt.
As part of the Pennsylvania School Credit Enhancement Direct-Pay Intercept Program, Fitch gives the bonds an A-plus enhanced rating.
Preliminary fiscal year 2014 data indicate that the district had an estimated $67 million decline in fund balance, worse than the budgeted $39 million budgeted deficit, said Fitch Director Eric Friedman. The district bridged a $250 million deficit in fiscal 2013 with deficit bonds.
The district is legally required to shift district money to charter school operators to follow students who have made the switch. The number of students attending city charter schools has nearly doubled in the past four years, Friedman said. The increasing relative attendance at charter schools versus the district's own schools is expected to continue.
In addition, Friedman pointed to other district weaknesses. The district's level of debt is high relative to the tax base. "The state's increasingly challenged financial position limits the likelihood of increased state aid," Friedman said.
The district participates in a state-sponsored pension plan that is approximately 63% funded using a Fitch-adjusted 7% return level. The funding level has been deteriorating.
Nevertheless, the district's bonds are protected by a sound Pennsylvania intercept program with solid debt service coverage, Friedman said.