Moody's Investors Service last week affirmed its Aa2 and Aa3 ratings and stable outlook on $14.4 billion of outstanding bonds enhanced by the Michigan school bond qualification and loan program.

The agency rates at Aa2 the bonds that feature an additional credit strength feature implemented in 1998. The Aa3-rated bonds are those without the credit enhancement.

Under the school bond qualification and loan program, the state has a constitutional obligation to cover debt service for a district that is unable to make timely payments.

The post-1998 credit enhancement structure features a requirement that an independent third-party — the paying agent that typically receives debt service payments from the district — notify the state if it hasn't received its payment five days prior to the due date, according to Moody's.

If the district does not make the payment, the Michigan Department of Treasury is required to make a loan from the school program fund to make the payments. The program's rating is tied to the state's Aa2 general obligation bond rating.

"The same factors that challenge the state of Michigan — a weakened economy and diminished reserves — could, over time, affect the underlying credit quality of individual municipalities and school districts should there be further reductions in state aid," wrote analyst Edward Hampton in a report on the rating affirmation.

"Following the passage of Proposal A in 1994, school districts have been significantly reliant on state aid. We will continue to monitor the impact of these credit factors on individual credits," he said.

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