DALLAS — Detroit Public Schools is moving perilously closer to a possible default or Chapter 9 filing as the distressed district waits on lawmakers to bridge their differences to pass a state-subsidized rescue, Moody's Investors Service said in a commentary.
The House and Senate have each passed their own versions of a restructuring. But stark differences between the legislation passed by the two chambers must be resolved and the clock is ticking with the district expected to exhaust $50 million in state approved emergency funding at the end of June.
The legislature "now has less than two months to compromise on a reform package or the district's financial position will possibly force a bankruptcy filing," Moody's wrote. "Failure to implement a solution increases risks to all of the district's bondholders."
Moody's said it expects the district's $1.4 billion of general obligation unlimited tax bonds would remain unimpaired because all of it is supported by the state's School Bond Qualification Program. If the district lands in Chapter 9, the rating agency cautioned that "the state's commitment to the program has never been tested under a Chapter 9 scenario."
Holders of the district's $259 million in long-term state aid revenue debt from unrated series in 2011, 2012, 2014, and 2015 faces risky prospects "given the district's severely constrained reserves, despite a first claim on state aid," Moody's said.
Debt service is paid directly from a set aside of state aid that would otherwise be available for the district's general operations, contributing to the district's cash flow crunch. "The fact that outstanding debt has a senior lien on state aid drives the emergency manager's conclusion that the district may not be able to make payroll after 30 June," Moody's said.
Debt service on existing state aid revenue debt totals $105.3 million in fiscal 2017, which includes set-aside payments of $26.1 million in July and $26.2 million in August.
"Without an infusion of a significant amount of additional cash beyond the district's existing short-term borrowing authority in fiscal 2017, it would be highly unlikely that the district would have resources to make payroll and debt service throughout the year," Moody's wrote.
After August, the district would rely on its fiscal 2017 state aid payments. The district is budgeted to receive approximately $380 million in fiscal 2016 state aid as compared to annual debt service of $105.3 million currently due in fiscal 2017, according to Moody's analyst Andrew Van Dyck Dobos, who authored the commentary included in Moody's weekly outlook Monday.
Gov. Rick Snyder, who has spearheaded the overhaul, and other supporters have not commented on a contingency plan should lawmakers fail to reach an adequate agreement.
"Additional emergency funding would provide immediate cash flow relief, but would not solve the significant operating deficit," Moody's wrote. "Alternatively, the district could seek bankruptcy protection under Chapter 9, which would require a recommendation by the emergency manager and approval by the governor."
The school system, rated Caa1 by Moody's, has requested $200 million in appropriations to cover the expenses associated with transitioning to a new school system. The district needs the money to keep afloat in the fiscal year that begins July 1 as well as improve school buildings and educational programs in a bid to reverse decades of declining enrollment.
DPS Emergency Manager Steven Rhodes first laid out how the $200 million in transition costs would be spent in an
The House bills provide less funding for the district's transition costs than the Senate package. Last month Michigan Senate approved Snyder's request for $200 million in transition funds and $515 million for debt relief. House Republicans last week approved $467 million for debt relief and $33 million for transitional costs.
Both plans propose to divide the district into two. The current school district would be left intact only to levy taxes and repay existing bonds. The new district, known as Detroit Community District, would own assets and operate the schools.
