CHICAGO — Detroit Public Schools hopes to enter the market in the next two weeks to float a deficit bond issue that would eliminate two-thirds of its red ink.

The transaction will convert short-term notes issued for cash-flow purposes into longer-term bonds. The structure is modeled after a 2005 DPS transaction that converted $213 million of state aid notes into 15-year bonds.

The Michigan Finance Authority, which will issue the bonds on the system’s behalf, approved the deal last Friday.

The resolutions allow the district to borrow up to $300 million. Of that, $248 million would refund the principal and interest of the notes and the rest of the proceeds would be used to fund a reserve fund if necessary, according to Terry Stanton, spokesman for the Finance Authority.

The debt will be backed by the state aid intercept program, which is expected to earn it higher ratings, as well as DPS’ property tax pledge.

Siebert Branford Shank & Co. will be senior manager and JPMorgan will be co-senior.

Lewis & Monday PC is bond counsel. Dykema Gossett PLLC is bond counsel for the MFA. Public Financial Management Inc. is financial advisor. No ratings have been released yet.

The district wants to close the deal by Oct. 20 in order to meet looming debt payments, said William Aldridge, DPS’ new chief financial officer.

Aldridge re-joins the school system from a Detroit-based consulting firm. He served as the district’s CFO from 1996 to 2000 and before that was its chief accountant in charge of budget and finance operations. Prior to that, he was at the Cleveland school district.

The finance team and state and local officials are scrambling to work out several issues ahead of the pricing, Aldridge said. Chief among them is detailing for investors the fiscal impact of a new statewide education system that is set to take over several Detroit schools beginning next year.

The new authority, called the Education Achievement System, will take over the lowest-performing 5% of schools in the state, starting with several in Detroit next fall.

Michigan Gov. Rick Snyder announced the new authority in June, and officials are still ironing out the final details, Aldridge said.

“Detroit has agreed to be the lead district and as the details are worked out, there will be some impact on the district and we are aggressively and intensively trying to determine what the likely scenarios might be, and to the extent that we can do that, that would be part of disclosure [to investors],” said Aldridge.

DPS is also in the midst of a months-long effort to gain support in the Michigan Legislature for a bill that would effectively insulate from potential bankruptcy school district debt issued as cash-flow borrowings through the state aid intercept program. 

The measure targets the district’s 2005 bonds, and presumably the upcoming financing.

For DPS, winning passage of the legislation is important. The 2005 bonds are insured by Assured Guaranty Ltd., which has warned it will require the district to accelerate repayment of the bonds next year unless the law passes.

“That’s up to our good folk in Lansing,” Aldridge said. “With the clock ticking, there’s a sense of 'let’s get it done.’ ”

The district can continue to access the  markets without the bill, but passage would strengthen the credit and make it less costly for the system to issue short-term notes next year, according to Aldridge.

The cash-strapped district faces a $327 million deficit, representing 65% of its general fund.

The new DPS emergency manager, Roy Roberts, released a proposed $1.2 billion spending plan in June that relies on the deficit financing.

The budget gap has widened despite the district being under state-controlled emergency management since early 2009. Long-time manager Robert Bobb recently left the job, and Snyder in mid-May appointed Roberts, a former General Motors executive.

The budget relies on the $200 million bond sale to cut the $327.3 million deficit to $127 million. It trims an additional $231 million in spending, in part by reducing the district’s workforce.

Operating budget revenues total $1.24 billion and operating expenses total $1.04 billion. Personnel costs make up $670 million of the total, which is down from $1 billion in fiscal 2009.

The general fund budget totals $682.3 million. Of that, state aid makes up $363 million and property tax revenue makes up $81.6 million, according to DPS budget documents.

Debt service in the new budget would increase to $41.7 million in 2012, or $628 per student. That’s down from $55.7 million in fiscal 2011 but up from $24.7 million in 2009.

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