CHICAGO - Dramatic enrollment declines at the long-troubled Detroit Public Schools prompted downgrades from Standard & Poor's on a chunk of the district's state-aid backed bonds.
S&P lowered its rating on Michigan Finance Authority's 2011 revenue bonds to A from A-plus and 2012 revenue bonds to A-minus from A-plus. Both series were issued for the Detroit schools,
The outlook is negative, reflecting a one-in-three chance the bonds could be downgraded again over the next two years.
"The downgrade is based on severe declines in the district's enrollment, and subsequently, pledged state aid available to pay debt service," analysts said in the downgrade report. The district's continued overall financial and liquidity deterioration is another contributing factor. S&P does not have an underlying issuer rating on DPS.
The ratings agency also said it doesn't think it's likely that the district's emergency manager will ask to take the district into bankruptcy, though it's allowed under state law. Even if there were a bankruptcy, the state aid pledge in the bonds is a statutory lien under state law, analysts wrote.
"We draw favorable comparisons with Detroit's distributable state aid bonds, which are secured by a lien on pledged state aid that is authorized using similar language and which were not affected during Detroit's bankruptcy proceeding," analysts said, adding it's ultimately uncertain how a federal court would treat the bonds in a Chapter 9.
The downgrade comes ahead of a proposal expected this fall from Gov. Rick Snyder to restructure the district. The proposal is expected to divide the district into an 'old' and 'new' company, with the old company taking over the bulk of the district's debt and the new company all educational duties. S&P said its negative outlook reflects the uncertainty surrounding the proposal and other pressures.
"The negative outlook reflects our view of the uncertain impact of the district's proposed restructuring, as announced by the governor of Michigan, on enrollment and the state aid pledge," S&P said. "The negative outlook also reflects uncertainty with regard to delinquent pension payments, which could potentially result in additional claims on state aid and subsequently, lower debt service coverage."
Falling enrollment plagues many Michigan school districts, prompting widespread downgrades from Moody's Investors Service. DPS has seen some of the steepest drops, though it remains the largest district in the state, S&P noted.
Enrollment at DPS fell an average of 12.5% from fiscal 2007 to 2012, then dropped 23% in fiscal 2013, after the state created a new educational authority to take over failing schools. Enrollment fell 5.5% in fiscal 2014 and was down 2.8% in fiscal 2015, for a total of 47,160 students.