OREANDA-NEWS. S&P Global Ratings lowered its long-term rating on McKeesport Area School District, Pa.'s outstanding general obligation (GO) debt two notches to 'BBB+' from 'A', and at the same time, assigned its 'BBB+' rating to the district's series 2016A GO notes. The outlook is stable.

"The downgrade reflects an ongoing structural imbalance that has weakened its budgetary flexibility, said S&P Global Ratings credit analyst Victor Medeiros. Also contributing to the downgrade is the one-time use of bond proceeds to refund the district's fiscal 2017 debt service payments for the series 1997D, 1999C, 2005B, 2011, 2012, and 2014A GO bonds to provide budgetary flexibility.

"We view the use of bond proceeds as an indication of fiscal stress, and which will result in elevated debt service payments in the future," added Mr. Medeiros. While the refunding of current debt service payments will provide immediate budgetary relief and flexibility, we believe rising pension costs and elevated debt service payments will continue to pressure the budget for the foreseeable future.

The district's full faith and credit GO pledge secures the notes subject to the limitations of the Act 1 Index.

The district, in southeastern Allegheny County about 15 miles southeast of Pittsburgh and encompasses 14.7 square miles, including the city of McKeesport; the township of South Versailles; and the boroughs of Dravosburg, Versailles, and White Oak. It operates four schools, including two elementary schools (K-5), one middle school, and one high school. Enrollment for 2016 totaled 3,533. It decreased overall from 2012 to 2016, and is expected to continue the long-term trend of gradual decline.

"The stable outlook reflects our view that the district's fund balance will increase to levels we consider good by the end of fiscal 2017 as a result of two distressed refundings for budgetary relief," added Mr. Medeiros, "and our expectation that management will take the necessary steps to increase local revenues to help stabilize budgetary performance." As such, we do not expect to change the rating during the one-year outlook horizon.

If wealth and income indicators improve to levels on par with higher rated peers, and the district can return to structural balance and build the fund balance to levels we consider strong while reducing its high debt burden over time, we could consider raising the rating. Conversely, if the district can't return to structural balance as a result of increasing pension and elevated debt service costs, and if its fund balance decreases to levels we consider low, we could consider lowering the rating.