Although state per pupil aid should not decline further, some districts will continue to face financial challenges in the absence of stabilized enrollments or increased state aid, according the new Moody's report "Michigan School Districts Under Pressure: Outlook Remains Negative."

"We expect the majority of districts to continue to manage challenges and maintain fiscal stability," says Matthew Butler, the Moody's analyst who wrote the report. "However, additional rating downgrades may occur for districts under immense pressure as well as for those that have exhausted options to cut expenditures."

Districts with rapidly declining enrollment and waning operating revenue face the biggest challenges. A small number are dealing with extremely high rates of declining enrollment with no clear indication that the trends will reverse soon. Moody's already rates five of these most pressured districts below investment grade; they include the Detroit Public Schools and the Pontiac City School district. Of the 14 school districts rated in the Baa category and below, seven had negative general fund balances at the close of FY 2011.

In recent years, rating downgrades among Michigan school districts have been concentrated in the economically challenged southeast region of the state, which accounted for nearly 80% of the downgrades Moody's has taken since January 2009. The area of the state is comprised mostly of the Detroit metropolitan area.

Statewide, enrollment in Michigan school districts has steadily declined since fiscal 2004 by an average of 1.3% annually and a total of 10%. Because school funding in Michigan is provided on a per-pupil basis, enrollment trends have a direct impact on school district operating revenues. The decline in enrollment mirrors the state population trend over the prior decade. Between the 2000 and 2010 census periods, population loss within the under-18 age group was a substantial 9.7%.

"While some individual districts have benefited from enrollment gains, many more have experienced enrollment declines on par with, or in excess of, the statewide trend and are expected to contend with further declines going forward," says Moody's Butler.

For more information, Moody's research subscribers can access this report at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_PBM147479.

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