DALLAS -- Williamston Community Schools in Michigan was dropped three notches into junk by Moody’s Investors Service Wednesday over its weak financial position and high levels of debt and pension liabilities.

It's a combination of traits many of the state’s school districts are struggling with.

Moody’s has downgraded 16 other school districts in the state so far this year based on the same concerns. Legislation signed by Gov. Rick Snyder Thursday is expected to make it easier for schools to contain and predict pension costs while significantly increasing state financial investment.

Moody's downgraded Williamston Community Schools in Michigan three notches into junk. Bloomberg

Moody’s downgraded Williamston to Ba1 from Baa1. The outlook is stable at the lower level. It has $38.4 million of general obligation debt rated by Moody’s.

“The downgrade to Ba1 reflects the district's chronically weak financial position that necessitates high levels of cash flow borrowing,” wrote Moody’s in a report. “Given its narrow reserve position and limited revenue raising flexibility, the district is poorly positioned to respond to any future shocks such as an acceleration of enrollment losses or a cut to state aid.”

In February 2016 the state identified Williamston Community Schools as one of several school districts in Michigan with potential fiscal stress. Gov. Rick Snyder signed "early warning" legislation in 2015 that expands the role of the Michigan Department of Treasury in overseeing districts that either have or are projected to have deficits for more than five years.

During fiscal years 2013-2015, Williamston drew a combined $997,000 from its available general fund balance, decreasing reserves to a deficit position of negative $224,000, or a very weak negative 1.3% of revenues at year-end fiscal 2015, from $993,000, or 6.1% of revenues in fiscal 2012.

In fiscal 2016, it closed with a minor operating surplus that increased its available general fund balance to negative $164,000, 0.9% of revenues and total available fund balance to a negative 0.8% at year end.

The district has since managed to improve its fiscal standing and reports ending fiscal 2017 with a $20,000 surplus and is budgeting for balanced operations for fiscal 2018.

The rating agency said that Williamston and school districts across the state continue to face risks tied to their exposure to the underfunded Michigan Public School Employees Retirement System MPSERS.

“Growth in retirement costs has been a key source of operating pressure in recent years as statutory contributions for all Michigan school districts increased significantly from 16.5% of payroll in 2009 to approximately 26% of payroll in 2015,” Moody’s said.

Legislation adopted in 2012 capped the share of payroll contributed by school districts to MPSERS related to the system's unfunded actuarial accrued liabilities and shifts any increase in costs to the state. “Growth in those costs may result in the state reducing funding for school district operations in order to pay for pension funding,” Moody’s said.

The 2018 state budget Gov. Rick Snyder is expected to sign includes $55 million to cover two-year upfront costs for teacher pension reforms along with $200 million to pay down debt accrued in the state’s legacy pension system.

The legislation Snyder signed today doesn’t address the accrued liabilities but backers say it will make it easier for schools to control and predict pension costs while significantly increasing state financial investment.

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