Moody's Investors Service said it has downgraded the rating on $39 million in Utica City School District, N.Y., outstanding debt to Baa2 from Baa1, and assigned an enhanced A2 and underlying Baa2 rating to the district's $22 million general obligation refunding bonds, Series 2013.

The outlook remains negative.

The A2 enhanced rating is based upon the additional security provisions offered by New York State's school debt intercept program. The long term general obligation rating on the State of New York is Aa2 with a stable outlook.

New York's school debt enhancement program, contained in Section 99-B of the State Finance law, authorizes the state to withhold future allotments of state aid in order to make bond payments in the event of default by the school district.

While the program does not ensure avoidance of a pending default or guarantee immediate repayments, Moody's believes it does enhance the potential for recovery upon default and that the cure period is likely to be short.

The downgrade of the district's Baa2 long-term rating reflects deterioration of the district's liquidity position as a result of two consecutive years of large general fund appropriations and the expectation of ongoing appropriation.

The rating also incorporates the districts moderately sized urban tax base marked by below-average socioeconomic indicators, and elevated debt burden made more manageable by the district's high level of state building aid.

The negative outlook reflects the likelihood of continued declines in liquidity during the near term and the expectation of continued use of reserves to augment budgetary increases.

Moody's has published a request for comment on a proposed methodology for post-default state aid intercept programs and financing which builds on the underlying credit of the borrower, a bottom up approach from the current rating approach that notches down from the state rating, a top down approach. Moody's expects that when the methodology is implemented, enhanced ratings on these programs could change.

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