LOS ANGELES — Moody's Investors Service downgraded Lake Elsinore Unified School District, Calif.'s issuer rating two notches to A2 from Aa3 Oct. 25 affecting $31.5 million in debt.

The rating agency also lowered the rating on its certificates of participation to Baa1 from A1 for the Riverside County school district that serves 22,000 students, Moody's analysts said.

The certificates of participation are secured by the district's pledge to annually budget and appropriate lease payments to the Lake Elsinore Schools Financing Authority for the use and occupancy of the Lakeland Village Middle School.

The downgrade, Moody's analysts said, reflects the district's extremely narrow liquidity and reserves brought on by state funding deferrals and a trend of unbalanced financial operations. While state funding pressures have improved, it will likely take the district years to replenish its reserves and liquidity back to healthy levels, according to the report.

The rating also takes into account the district's large tax base that is showing signs of recovery from the recession.

The COPs downgrade was to widen the notching to the standard, two-notch distinction for California school district lease-backed securities.

The one-notch previously reflected the unique earmarked revenues from tax increment pass-through, earmarked special taxes, and the financial strength of the district.

While special tax and tax increment revenues are sufficiently paying debt service, analysts said, the district's financial health has deteriorated. Because the bonds are ultimately secured by the district, and the district's financial flexibility is very limited, the two notch distinction is deemed more appropriate.

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