CHICAGO - Moody's Investors Service hit Detroit Public Schools with another downgrade late Monday, warning that the troubled district faces major fiscal stress and a rising debt burden.

Moody's pushed the rating down one notch to Caa1 from B3. The district is now seven notches below investment grade. The outlook remains negative, Moody's said.

The district has $2 billion of debt, most of it limited-tax general obligation bonds and state aid revenue bonds.

"The Caa1 issuer rating incorporates continued fiscal stress as indicated by significant growth in the district's accumulated operating fund balance deficit in fiscal 2014 and ongoing declines in enrollment that pressure operating revenue and the district's capacity to reverse the negative operating trend," Moody's wrote March 24. "The rating also considers the weak economic profile of the city of Detroit (B3 stable), the district's substantial debt burden, and an operating budget constrained by high fixed costs."

Without an increase in enrollment or revenue, the district will continue to be burdened by growing fixed costs, Moody's said.

The negative outlook reflects an expectation that the district will continue to face financial stress coupled with high debt and economic challenges. Another downgrade may come if bankruptcy becomes more of an option or if cash flow becomes insufficient due to statutory limits on short-term borrowing, analysts said.

The negative ratings action comes as Michigan Gov. Rick Snyder has said that improving Detroit's school district is one of his top priorities this year.

A coalition of labor, business and school leaders is expected to make a series of recommendations to Snyder after March 31. The group is said to be focused in part on lowering or restructuring the district's debt.

Moody's is the only ratings agency to maintain an issuer rating on the district.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.