Moody's Investors Service said it has downgraded to Ba3 from Ba1 the underlying rating on Ypsilanti Public Schools, Mich.'s outstanding general obligation bonds and affirmed the negative outlook.
The Ba3 rating and negative outlook apply to $59.7 million of the district's outstanding general obligation debt.
Debt service on outstanding general obligation debt is secured by the district's unlimited tax pledge. The downgrade to the Ba3 rating reflects the possibility that the district may have insufficient cash on hand in the current fiscal year to meet operating expenditures when due.
The district's negative general fund balance is estimated to have worsened as of the close of fiscal 2012 and the negative position creates the potential of missed payroll at some point in the fiscal year given statutory limits on the amount of education aid that can be borrowed as an advance from the state. Furthermore, the district has limited options to address its projected negative cash positions and may be reliant on emergency assistance from the state.
The district is not expected to miss bond payments as debt service on all outstanding bonds is first secured by dedicated, unlimited tax levies, and further secured by the State of Michigan's School Bond Qualification and Loan Program (SBQLP).
Under the program, the state has a constitutional obligation to provide a school district with sufficient funds to make timely debt service payments, if necessary. Should the school district fail to transfer sufficient funds to the paying agent, the Michigan Department of Treasury is notified of the deficiency and the state treasurer must make a loan from the state's school loan revolving fund (SLRF) to ensure timely debt service payment.
The Ba3 underlying rating has been assigned to the district's outstanding Series 2005 and Series 2007 general obligation bonds. This rating also incorporates the district's moderately-sized tax base located between Ann Arbor (general obligation rated Aa1) and Detroit (B3/rating under review for possible downgrade), a multi-year trend of declining enrollment, and an above-average debt burden. The Series 2007 general obligation bonds, of which $46.2 million in principal is outstanding, also carry a Aa2 enhanced rating with stable outlook, which is based on the state's general obligation rating and the additional security provided by the SBQLP.
Affirmation of the negative outlook reflects the possibility that the district's underlying credit quality could weaken further in the near term. An inability to adjust expenditures to meet declining revenues could further stress the district's operations and extend the timeline for eliminating the accumulated general fund deficit. Worsening of the district's financial position could trigger a financial review by the state, which, while providing additional oversight, could open the door to bankruptcy proceedings should emergency management be appointed.
