DALLAS — The Detroit Public Schools' recent emergency funding package is a credit positive because it signals the state government's commitment to help solve the district's severe financial distress, Moody's Investors Service said.
The nearly $50 million will come to the district through a legislation Michigan Gov. Rick Snyder signed this week.
It doesn't get to the roots of the district's ongoing cash drought, but alleviates the district's immediate cash flow problems and guarantees teachers are paid through the end of the school year. The emergency funding also helps offset the district's projected $61.2 million operating deficit for the fiscal year.
"The funding is credit positive to the extent that it demonstrates state commitment to help the district and possibly implement broader reforms," the Moody's report says. "However, it is a short-term fix that does not correct the district's ongoing structural deficits".
Snyder signed the bill Tuesday. He also signed legislation expanding the role of the Financial Review Commission that works with the city of Detroit on its finances to include the school district as well.
"There was a pressing need in Detroit that lawmakers from all across the state came together to address, and they got it done quickly," Snyder said. "This continues to demonstrate that the challenges at DPS aren't just Detroit's problem, they are concerns for all of Michigan. We are committed to academic improvement and long-term financial stability at DPS."
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 of cash this spring because of rising debt payments. It has tapped out its state loan capacity under law and any new debt would only add to a burden that is driving its current liquidity crisis.
"Debt service obligations from previous cash flow borrowing is a principal factor in the district's current liquidity crunch as debt service currently equals 8% of annual revenues" the report said.
More significant changes are contained in a six-bill restructuring package that passed the state Senate last month and is awaiting hearings in Michigan's House.
The bills would split Detroit Public Schools into two entities.
The current school district -- Detroit Public Schools -- would be left intact only to levy taxes and repay the district's existing bond debts. A new school district, known as Detroit Community District, would own assets and operate the schools.
The bills propose $200 million in transition funds to form the new community district. An additional $515 million would be appropriated to fund the education needs and operation of the new community district.
"The split of the district has the potential to be a significantly positive event for bondholders," stated the Moody's report. "The plan defines a continuing revenue source to provide for debt service on outstanding bonds, while eliminating the operating risk associated' for the new district.
On March 10th, Moody's affirmed its deep-junk-bond-level Caa1 implied GO issuer rating and negative outlook on the district's outstanding bonds.
