Detroit's public school district is hunting for capital funds

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The Detroit Public Schools Community District is preparing to exit from state oversight and trying to drum up support for much needed capital funding as it attempts to build its own credit standing.

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. The district, which was separated from the former Detroit Public Schools as part of a $617 million state bailout package in 2016, has budgeted just $9 million for capital expenses out of a budget of roughly $760 million.

Andrew Van Dyck Dobos, the lead Moody’s Investors Service analyst on Detroit Public Schools, said the district’s imminent exit from state oversight could serve to increase its standing as a standalone credit.

Moody’s rates Detroit Public Schools, the former school district entity that exists solely to service its old debt, B2 with a stable outlook, but does not rate the new DPSCD because it has no outstanding debt.

“DPSCD is still in flux right now on what they will be able to accomplish in terms of working with the politicians in Lansing regarding their capital funding needs and the governor’s office as well,” Van Dyck Dobos said.

Superintendent Nikolai Vitti says right now his goal is to share the district's needs with the business community and parents in an effort to drum up support and put pressure on state lawmakers for change.

Vitti said that the district is in line to shed state oversight in the next six months 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.

Vitti said the new district is already eligible to issue municipal securities or debt obligations, complies with state laws regarding local government budgeting, and makes all payments to the state’s school employee retirement system — three conditions it must meet to regain local control. The district is also required to approve balanced budgets three years in a row. It has already had two consecutive years of balanced budgets and is on track for a third.

Craig Thiel at the Citizens Research Council of Michigan said the focus right now in Lansing is on the $500 million increase in education spending for K-12 schools but nothing new related to schools facilities either generally or specifically for Detroit.

“There has been a clear acknowledgment that there is an issue with financing but that is not new news,” Thiel said. “This goes back years. My guess is the new superintendent which has been there for about two years now is trying to figure out he can go about making the ask of the legislature and want to figure out where Gov. Whitmer sits on this because he is going to need their support.”

Whitmer, a first-year Democrat, has expressed a willingness to work with the district.

“The best thing that we can do is get a budget passed that actually invests in the education of kids,” said Whitmer's press secretary, Tiffany Brown. “The next phase would be to focus on remedying our issues with regard to infrastructure and assessing ways to help DPS make the investments in the facilities.”

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.

The Michigan Legislature’s $617 million bailout blocks the new school district from accumulating any new capital debt until 2040, with the system’s existing 13 mill tax rate for capital improvements dedicated to paying $1.63 billion in old debt from eight capital municipal bond issues between 1998 and 2010.

District spokeswoman Chrystal Wilson said $1.09 billion remains due on the 1994 bonds while $485 million is due from the 2009 bonds. The school loan balance is $60.6 million.

The split allowed DPSCD to begin with a clean balance sheet, in part by shedding approximately $53 million in annual debt service expenditures beginning in fiscal 2017. This relief, along with a one-time transfer of $45.2 million from DPS, enabled DPSCD to post a positive general fund balance in fiscal 2017.

Van Dyck Dobos said the district's infrastructure problem has not had an immediate impact on the district’s finances. According to Vitti, enrollment is up 4,800 students over the past three years bringing the district up to nearly 51,000 students across 106 schools.

“The district is financed primarily through enrollment and right now their enrollment is stable," Van Dyck Dobos said. "If those conditions substantially deteriorate there could be outgoing students which could directly impact the district's revenues."

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