CHICAGO – Detroit Public Schools may run out of funds to meet payroll after April 8, the district's new transition leader told lawmakers who are being asked by Gov. Rick Snyder to approve $50 million in emergency aid.
Retired U.S. Bankruptcy Judge Steven Rhodes, who was recently named DPS' transition manager by Snyder, made the comments Wednesday during a House committee hearing. He testified with newly appointed interim superintendent Alycia Meriweather. Lawmakers are considering a massive restructuring of the district proposed by Snyder.
"I'm deeply concerned about the district running out of money on April 8th. There is no Plan B," said Rhodes, who presided over the city of Detroit's Chapter 9 bankruptcy. The district is pressing state lawmakers to act quickly on the supplemental funding bill ahead of their spring break later this month.
Unions that represent teachers and other school professionals responded by also stressing the need for the emergency funds.
"If Detroit Public Schools runs out of money on April 8, the stark reality is that Detroit's students won't have schools to attend, many students won't receive breakfast or lunch, and educators and school staff won't get paid," a statement said. "We now have a date and a real urgency to get serious about making sure our schools are adequately funded."
The threat that schools could be shuttered, which in turn could pare down its share of state aid payments, prompted Standard & Poor's Thursday to put its ratings on about $469 million of bonds and notes from issues in 2011, 2012, and 2015 on Credit Watch with negative implications.
"Because our rating reflects the pledge of state aid for the bonds and notes--and debt service coverage is a key feature of the criteria--the absence of that security would cause significant rating pressure," analyst Jane Ridley write.
Standard & Poor's rates 2011 first lien bonds A and 2012 second lien bonds A-minus. Junior subordinated notes are rated SP-2 and fourth lien notes are rated SP-3. The action impacts $265 million of bonds and $204 million of notes, according to Ridley.
Moody's Investors Service Thursday affirmed its deep-junk-bond-level Caa1 implied GO issuer rating and negative outlook. Most of the district's carries state support.
"The Caa1 issuer rating reflects the district's severely stressed financial position, which includes a growing deficit General Fund balance, very narrow liquidity, and ongoing revenue challenges associated with annual declines in enrollment," Moody's said. "The negative outlook reflects the district's challenge to remain financially viable absent state intervention and does not assume passage of any new legislation
The district, under state emergency management oversight for the last seven years, has long been warning that its cash position was precarious and it could run short on cash this spring because of rising debt payments. The district has limited options. It's tapped out on its state loan capacity under law and any new debt would only add to a burden that is driving its current liquidity crisis.
The district has a $515 million operating deficit. Its long-term debt load includes $1.5 billion of unlimited-tax general obligation bonds, $199 million in borrowing from the state's School Loan Revolving Fund, and $259 million in limited-tax GO debt paid by district operating revenues. The majority of bonds carry support from the state's school bond loan fund.
Snyder's plan is reflected in a package of Senate bills would split Detroit Public Schools into two entities. Under the plan, the current school district -- Detroit Public Schools -- would be left intact only to levy taxes and repay all of the district's existing bond debts.
A new school district, known as Detroit Community Schools, would be established without the burden of the bonded debt or operating deficit. It would own assets and operate the schools. An appointed board would initially operate the schools but governance would shift to an elected board next year.
The bills earmark $250 million from the general fund for the plan and $72 million in annual tobacco settlement proceeds would be applied to pay down DPS' operating deficit.
A House package of bills has drawn more controversy because they include collective bargaining curbs and delay installation of an elected board for eight years. Hearings are ongoing on both sets of bills but there's been little agreement on how to proceed.