In this morning’s eBlog, we focus—again—on the grave challenge to Detroit’s kids—and the city’s future—in the wake of an S&P downgrade of DPS. Because the quality of schools is so vital to parents’ considerations of where to live, Detroit’s long-term recovery from the nation’s largest municipal bankruptcy is intertwined with the success or failure of DPS.
Getting ready to do the Math at DPS. Standard and Poor’s has downgraded two sets of Detroit Public Schools municipal bonds—and expressed apprehension with regard to the legislature’s rearrangement of the school district in two, an “old” and “new”—effective last Friday—with the old one created by the new state law with its sole role to pay off debt with tax revenues; the new one receives state aid payments to educate students. Expressing doubts the DPS municipal bonds will be paid off, S&P has announced that it would downgrade bonds DPS bonds issued in 2011 and 2012. The downgrade relates to S&P’s apprehension that because the bonds are no longer backed by state aid payments, which go to the new district, it lacks confidence the bondholders will be repaid. As it happens, these are the same bonds the new district is looking to refinance for that very reason. For his part, transition manager Steven Rhodes has asked the Detroit school board to approve up to $235 million in loans to help with that refinancing—a request the board rejected—expressing apprehension about a possible spike in interest rates on the loan. That means Judge Rhodes is likely to turn to the state emergency loan board.
The difficult governing imbroglio signals that S&P might impose still more downgrades, noting: “The CreditWatch on the bonds reflects our view that the complexity of the situation, the looming requirement to redeem, defease, or refund the bonds, and the numerous parties involved—including the split district and Michigan—result in a more than a 50% chance we will lower the rating over the next three months, and could take more than one rating action during that time if warranted.” A key concern is with the lack of information on how bond repayments will work under DPS’ restructuring—with the rating on each series of bonds based on DPS’ pledge of state aid, or, as S&P noted: “It is our understanding that under the new legislation, the state aid bonds will have to be redeemed, refunded, or defeased, because state aid can only flow to school districts that have students, and the Old Co will not have any students…If the actions taken through this [restructuring] process provide bondholders with anything less than the full promise of the original bonds, it is likely to be considered a distressed exchange and therefore a default under our criteria.” S&P noted there is a 50 percent chance that it will lower the ratings again over the next three months if it views the redemption as providing less than the original promise—warning the rating could sink to D. DPS’s debt includes $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from Michigan’s School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues, rather than a dedicated debt service levy. Under the new state legislation, the new Detroit Community District will own assets and operate the schools. DPS survives solely to collect tax millage and service debt outstanding; it is no longer eligible to receive distributable state aid. State aid will remain pledged to the existing bonds and 2015-E notes until the end of September. According to S&P, DPS has been making set aside payments to repay the 2015-E notes in full at their August 2016 maturity. The key arithmetic apprehension, however, is how DPS will repay bondholders once the flow of state aid stops—or, as S&P put it: “Under the new legislation, once the restructuring is effectuated, the series 2011 and 2012 bonds would no longer be supported by a pledge of distributable state aid and the only remaining pledge backing the bonds would be the limited tax general obligation pledge.”
The Detroit Free Press, in a June 22nd editorial, noted: “In Michigan, it’s not just Detroit schools that are in trouble…Despite a year of pushing for a real reform package for Detroit’s public schools, [Gov.] Snyder and Senate Majority Leader Arlan Meekhof (R-West Olive), caved in the face of Cotter’s mean-spirited partisanship, passing a set of bills that offer little promise that public education in Detroit will improve. Detroit public schools’ doors will stay open, but barely — without the funds to effect real change, or the controls that could require rational geographic placement or consistent academic standards among all of Detroit’s public schools…With bankruptcy looming, and the futures of nearly 100,000 children on the line, Snyder and the Legislature whiffed, sending a remedy to the state’s largest school district that only works on paper.
“And this is what, if you live in this state, you should be asking yourself: If Michigan Republicans won’t send real help to a district on fire, a district so sunk by disinvestment and mismanagement and neglect that it would cease to exist without intervention, do you really believe they’ll act to stop the slow burn in yours?”