NEW YORK - Moody's Investors Service said it has downgraded to Baa2 from A2 the underlying rating on Perry Public Schools, Mich.'s $23.3 million of outstanding rated general obligation bonds and assigned a negative outlook.

The bonds are secured by the district's general obligation unlimited tax pledge.

The downgrade to the Baa2 rating primarily reflects the steady deterioration of the district's reserves, which have become very narrow and are estimated to fall to a negative position at the end of the current year.

Also included in the rationale for the downgrade are declines in the district's full valuation, ongoing reliance on state aid revenues to fund operations with little flexibility to raise additional revenue, and an above average debt burden.

The negative outlook reflects our expectation that the district's financial operations will face further stress in the near term owing to persistent declines in enrollment that will likely continue.

As operating revenues are highly dependent on enrollment, ongoing declines will result in further losses of revenue to support operations.

Without considerable budgetary adjustments, the district's expected negative general fund balance is likely to continue for the next couple years, resulting in ongoing reliance on cash-flow borrowing to fund operations.

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