CHICAGO – School districts across Ohio, which have already suffered widespread downgrades during the last two years, will continue to face fiscal and rating pressures over the next few years, Fitch Ratings warns in a new report.

Districts face pressure from property tax revenue that is flat or declining, coupled with state aid cuts and the unwillingness of voters to approve new levies, Fitch said.

The rating agency over the past two years has downgraded seven, or 35%, of the 20 Ohio districts it rates.

Downgrades will continue to outpace upgrades, though the credit quality of most districts will remain stable over the near term, Fitch said.

“Fitch believes that in order to sustain fiscal stability, many districts will be forced to manage budget gaps through continued expenditure reductions or use of available reserves,” analysts said in the report, “Ohio School Districts Under Continued Financial Strain.”

“Districts that have previously both cut services significantly and spent down a large portion of their reserves will have the least financial flexibility in light of the challenged revenue environment and will face downgrade rating pressure.”

Ohio’s slow economic recovery – though the economy appears to be rebounding – contributes to school district’s problems, analysts said.

Education eats up a large part of the general fund budget, and the state has repeatedly chopped K-12 funding since 2007.

The current two-year budget features increases in education spending. But overall K-12 spending is down 3%, or $233 million in fiscal 2012, when the loss of recent federal stimulus dollars is figured in, according to Fitch.

About half of school district costs come from local property tax revenues, which have seen serious declines over the past few years.

Unlike many states, Ohio does not allow school tax revenue to rise along with increases in property tax values, which further constrains recovery and is a credit negative, Fitch said.

Districts face limited options for new revenue as voters are generally reluctant to approve new property tax levies.

“Fitch expects this trend of taxpayers unwilling to vote for new money to continue,” the report said. “Fitch views the ability to offset declining revenues via tax rate increases to be limited, and therefore most districts will need to focus on further expense reductions.”

School districts can also ask voters to approve an income-tax levy as an alternative to property taxes. But voter support for income-tax levies has also been weak, with an approval rate of about 30%, mostly in rural areas.

Strong management that is willing to make cuts will be increasingly important to maintain stability and avoid a rating downgrade, analysts said.

“The continued ability to reduce expenditures, given the weak track record of obtaining voter approval for new tax levies, will be key to maintaining credit quality and financial flexibility,” Fitch said.

The ability to negotiate new labor contracts that include savings for the districts will be important, analysts said.

Gov. John Kasich has proposed a revamp of the school funding formula for 2013, but has not yet unveiled the details of his plan.

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