Onsted Community Schools, MI Rating Outlook Revised To Negative From Stable On Declining Reserves

SAN FRANCISCO (S&P Global Ratings) April 24, 2019--S&P Global Ratings revised its rating outlook on Onsted Community Schools, Mich. to negative from stable, and affirmed its 'AA-' rating on the district's general obligation (GO) debt outstanding.
"The outlook change reflects our opinion that there is a one-in-three chance the district's available reserves could be negatively affected and fall to levels that would not be comparable with those of similarly rated peers due to declining student enrollment, which determines state aid and represents over 70% of general fund revenue," said S&P Global Ratings credit analyst Erich Schmitz.
The decrease in enrollment over the past few years has contributed to declining reserves. While enrollment is projected to decline at a lower rate than previously experienced, we believe it will continue to place pressure on the budget and may contribute to further depletion of reserves. A general fund surplus is expected in fiscal 2019, which should increase reserves. However, if the enrollment decline continues to pressure the budget, prohibiting reserves from being sustained at levels we consider very strong, we could lower the rating.
The negative outlook reflects S&P Global Ratings' opinion of the district's reserves, which have decreased over the past five years, as well as enrollment decline, which determines state aid. We recognize the district anticipates a surplus for fiscal 2019; however, if enrollment decline continues to pressure operations, and the district cannot maintain reserves at levels we consider very strong and commensurate with those of similarly rated peers, we could lower the rating. However, if management is able to continue to make budgetary adjustments amidst enrollment declines to grow and maintain reserves at levels we consider very strong, we could revise the outlook to stable.
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