Detroit Public Schools get two-notch upgrade to Ba3

Detroit Public Schools, the legacy entity left to service school bonds after a new district was created to educate Detroit's children, has received a two-notch upgrade from Moody’s Investors Service.

Although still junk rated, the upgrade boosts the district’s issuer rating to Ba3 from B2, leaving it three notches below an investment grade rating. The outlook is stable.

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The issuer rating is the general obligation unlimited tax equivalent rating. Moody's does not rate the district's $2 billion of outstanding GOULT debt. It rates the district’s $1.5 billion of outstanding state-supported debt Aa1.

Moody’s cited the strong support from the state of the district's financial operations as the reason for the upgrade but said the district’s long-term liabilities remain very high.

“The speculative grade rating continues to consider the very weak economic profile of the city of Detroit, of which low incomes, high poverty, out migration, and economic concentration are characteristics,” Moody’s said.

DPS exists solely to service legacy debt and is an entity separate from the Detroit Public Schools Community District, which is responsible for providing public education to Detroit students. The district was split into two as part of a $617 million bailout package passed by lawmakers in 2016. The districts have managerial overlap, including the same school board and administration.

DPSCD Superintendent Nikolai Vitti said he is excited about the upgrade but believes the district deserves further action from the rating agency that could lay the groundwork for the district's future access to the market.

“While Moody's views DPS in the same light as the City of Detroit, as you know, DPS is unique since our outstanding debt is secured through the state, and the legacy district is no longer operating,” Vitti said. “We have requested that Moody’s either not rate DPS since there is no new activity or it give the state’s Aa1 rating to reflect the state’s commitment to repaying the debt.”

Vitti also wants Moody’s and other credit ratings agencies to rate DPSCD.

He said district staff plans to work with the various credit rating agencies during the 2020 calendar year on that goal.

“At this time, DPSCD does not possess a credit rating,” Vitti said. “We want this to change. We believe that another successful audit, balanced budget, and exit from Financial Review Committee oversight would position the District (through DPSCD) for a different credit rating than the city of Detroit. In fact, a higher rating.”

Vitti said in May that the district was in line to shed state oversight sometime this year after nearly two decades of state control and supervision. The district has been under the oversight of the Detroit Financial Review Commission since 2016. Emergency management in the district ended Dec. 31, 2016. An empowered board, elected in November 2016, took office in January of 2017. Vitti was hired that May.

The district’s biggest fiscal challenge is finding at least $500 million to get its school buildings up to standards, Vitti said. A 2018 assessment by engineering consulting firm OHM Advisors found that funding needs could grow to more than $1 billion in the next four years if not now addressed.

“DPSCD has no debt and strong reserves. To address our facility challenges, we will need to gain access to the market through DPSCD,” Vitti said. “DPS only exists to manage the repaying of the debt, which, again, is secured through legislation.”

Michigan has not historically offered capital support for schools, in contrast with other states that provide matching grants or funding for capital. What the state has done historically is allowed for districts to issue bonds enhanced by the state’s credit quality.

DPSCD cannot issue debt to fund school construction through the state program because the old district, DPS, has already borrowed the maximum permitted by law.

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