DALLAS—Utica Community Schools in Macomb County, Michigan, suffered a three-notch downgrade as declining enrollment takes its toll on the district's books.
Moody's Investors Service on Tuesday downgraded the district's general obligation unlimited tax rating to A2 from Aa2. The Aa2 rating impacts $33.8 million of the district's $170.9 million of outstanding GOULT debt.
"The downgrade to A2 reflects the district's narrowing reserves and liquidity which continues to be challenged by declining student enrollment and limited financial flexibility," said Moody's.
The district's enrollment losses mean it gets less state revenue because it's based on a per student allocation. Over 80% of the district's operating revenue comes from the state.
The district's fiscal 2016 enrollment stands at 28,123 representing an average annual decline of nearly 1% over the last five years. For the upcoming school year, the district expects to lose another 420 students, according to Stephanie Eagen, assistant superintendent for business services. The decline, said Eagen, is due to a lower birthrate and an aging population.
Homeowners in the district all pay 6 mills in state education taxes. That is forwarded to the state for school aid fund. But the district is struggling with a decline in the taxable value for properties. From 2008 to 2012 the taxable value on properties plummeted and impacted the amount of taxes property owners are paying.
Although the district's tax base has since rebounded under Michigan's Proposal A law, the taxable value of a property is limited to the lesser of inflation or 5%. At this time, inflation is running at less than 1%.
"We are in a situation where less revenue is being generated by property tax for the school aid fund," Eagen said during a May 9 presentation on the district's 2016-17 budget. "It will take many years for the taxes to be restored to fund the school aid fund."
Following a sizable operating surplus in fiscal 2012 the district has run three consecutive operating deficits. In fiscal 2015, the district recorded an audited general fund operating deficit of $6.6 million, which reduced year-end reserves to $26 million. Eagen said that continued declining enrollment and state aid payments will result in projected expenses totaling $19.3 million more than the district expects to take in during the 2016-2017 school year.
The district's liquidity crunch has led to an increase in short-term borrowing through state aid anticipation notes. The district currently has $12.2 million in SANs outstanding, which mature on August 22, 2016.
"While the use of SANs is a common practice for districts in the State of Michigan, the district's newfound reliance on SANs to ensure adequate cash flow during low-points in the year is another example of the district's tightening financial position," said Moody's.
The district is expected to issue $25.6 million in GOULT bonds in June 2016, which includes $4 million to advance refund 2007 bonds and raise $21.6 million of new money, according to Moody's. Moody's has not been asked to rate the bonds.
