Moody's Investors Service said it has downgraded to Aa3 from Aa2 the underlying rating on the Upper Darby School District, Pa.'s $38 million of parity debt.

Concurrently, Moody's has assigned a Aa3 underlying rating and an A1 enhanced rating to the district's $4.43 million general obligation bonds, Series of 2012.

The outlook for the enhanced rating is stable.

The bonds are secured by the district's general obligation pledge as limited by Special Session Act 1 (Taxpayer Relief Act), which restricts Pennsylvania school districts' ability to increase their property tax millage beyond an annual index without seeking specific exemptions or voter approval.

Proceeds from the sale will be used to currently refund the district's Series B of 2004 bonds for an estimated net present value savings of $504,000, equal to approximately 12.6% of refunded principal. Savings will be taken over the next five fiscal years, with no extension of the maturity structure.

Downgrade of the underlying rating to Aa3 from Aa2 reflects the expectation of operating deficits in fiscal 2012 and 2013 that are likely to narrow reserves to weak levels, a recent history of assessed valuation declines driven by tax appeals, mature tax base with minimal available land for development, and considerable near-term capital needs given rising enrollments.

The Aa3 rating also factors in a sizable residential tax base located in suburban Philadelphia (rated A2/stable outlook), average demographics and manageable debt position.

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