Moody's Investors Services said it has downgraded to A2 from A1 the rating on the Schenectady City School District, N.Y.'s $73.8 million outstanding general obligation debt.

The debt is secured by a general obligation pledge of ad valorum taxes as limited by the Property Tax Cap - Legislation (Chapter 97 (Part A) of the Laws of the State of New York, 2011).

The downgrade to A2 reflects a material decline in the district's financial position, which is not expected to improve in the near term given rising fixed costs and a lack of financial flexibility.

This financial weakness is exacerbated by the district's dependence on volatile state aid revenues and the ongoing financial troubles of the city of Schenectady (GO rated A3, negative outlook), which guarantees the district's property tax revenues.

In fiscal 2011 and 2012, the city was late in remitting guaranteed property taxes to the district. Moody's will carefully monitor the timeliness of this transaction going forward as further strains on the district's cash flows, which already require annual-short term borrowing, may result in additional negative rating pressure.

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