DALLAS -- East Cleveland, Ohio's pursuit of Chapter 9 bankruptcy shouldn't hurt the city's school district, Moody's Investors Service says.
The school district's credit won't be directly impacted because the two operate with separate management and revenue streams, Moody's said in its weekly outlook published Friday.
East Cleveland City School District, which serves East Cleveland and a portion of Cleveland Heights, is primarily funded by state aid which accounts for 75% of its general funds with 16% coming from property taxes.
By comparison, East Cleveland relies considerably more on income tax revenue which accounts for 40% of its general fund; state aid makes up a smaller portion at 27%.
"If the city was to enter bankruptcy protection, East Cleveland City School District's bondholders would not be impacted by any potential adjustment of city debt because the district functions as a separate entity," Moody's analysts said in the report.
The district also doesn't rely on any services provided by the city so cuts the city must make to services under a Chapter 9 won't necessarily require the district to increase expenditures to maintain its operations.
Still, the school district isn't immune to the weak local economy that is one of the primary drivers of East Cleveland's insolvency.
"The city and school district share the same weak economic profile, which has been deteriorating for more than 30 years and seen an accelerated decline in the last 10 years," said Moody's. "With the city's struggles, the school district's property values have declined by 47.5% in the last 10 years."
In February 2015, Moody's downgraded $5.1 million of the school district's general obligation unlimited tax debt to A3 from A1. The A3 underlying rating reflects the district's sharply deteriorating financial position following multiple consecutive operating deficits resulting in drawdowns of reserves. The rating also incorporates the district's limited tax base, weak socio-economic profile, and high unfunded pension obligations.
East Cleveland's population is down about a third from 2000 and by more than half since 1950, when roughly 40,000 people lived there. About 40% of East Cleveland's residents live below the poverty line, according to the Census bureau. The city's median household income of $20,660 is less than half the statewide level of $48,849.
As the population has eroded so has the city's tax base. Income tax receipts for the city fell by 18% between 2007 and 2012, and government aid declined by 22% over the same period. Simultaneously, the city's operating expenses increased by 9%, resulting in significant operating deficits.
On April 27, East Cleveland Mayor Gary Norton Jr. requested approval from the Ohio tax commissioner for the city to file for Chapter 9 bankruptcy. Because the city has no outstanding bonds, East Cleveland is using municipal bankruptcy to protect the city's assets so that it can make payroll.
Ohio state tax commissioner Joe Testa responded to the request saying that the East Cleveland council as the "taxing authority" for the city must make the request.
The council is now considering a resolution to approve the bankruptcy request and has scheduled a public meeting for next Thursday to discuss finances, the potential filing of municipal bankruptcy, and updates on a potential East Cleveland-Cleveland merger.
The Council will consider an ordinance to enter into negotiations for annexation with Cleveland and to appoint three commissioners to represent the city in negotiations.
