School district woes could spell downgrade for Rochester, N.Y.

The budget struggles of Rochester, New York’s school district threaten to derail the city’s fiscal progress.

Moody’s Investors Service placed Rochester’s Aa3 issuer and general obligation limited tax rating on review for a possible downgrade Thursday citing reports of a $30 to 50 million shortfall in the school district’s 2019 fiscal year budget. The review was also prompted by city officials calling for the state to separate the district from the city.

Brady Dillsworth/Bloomberg

“The review for downgrade of the city's Aa3 issuer rating and GOLT rating is prompted by recent reports that the City School District, a component unit of the City of Rochester, incurred a $30 to 50 million budget shortfall in the 2018-2019 fiscal year, far exceeding our expectations for declines to reserves,” Moody’s analyst Robert Weber wrote. “If accurate, this development raises questions about the possibility of a large gap in the school district's 2019-2020 budget.”

The Moody’s review will focus on the roughly 26,000-student school system’s 2019 financial results and what the structural imbalance is shaping up to be for the current 2020 fiscal year. The analysis will also hone in on whether there is improved governance between the city and school district.

The potential of a downgrade comes three years after Rochester received a one-notch upgrade from S&P Global Ratings to AA-minus after New York State’s third largest city achieved improved budgetary practices amid growing property values. The city saw a 9.6% increase in total market during a revaluation process undertaken in the 2017 fiscal year under Mayor Lovely Warren. S&P recognized Rochester for having the strongest financial performance of any city in upstate New York this past March.

“The recently disclosed financial challenges of the Rochester City School District are concerning,” said city spokesman Justin Roj. “Mayor Warren and the City Council have introduced local legislation calling upon New York State to act and provide financial oversight of the district. It is our hope that the State will act expediently to do so to stabilize the District’s position, as well as, protect taxpayers and borrowers.”

The Rochester School District did not immediately respond to a request for comment on the Moody’s review or its fiscal conditions.

Rochester’s population levels stabilized this decade after a 13% drop between 1980 and 2015 amid a changing technological landscape where companies like Eastman Kodak scaled back operations in the city. The city’s population was estimated at 209,463 in the 2017 American Community Survey compared with 210,656 based in the 2010 Census.