Michigan charter schools would take hardest hit from a budget impasse
A prolonged Michigan budget battle would hit the state’s charter schools the hardest, according to S&P Global Ratings.
The Republican-led Michigan legislature approved $59.9 billion in state spending in budget bills while axing a controversial 45-cents-a-gallon fuel tax hike proposed by Gov. Gretchen Whitmer, setting the stage for a budget battle.
Whitmer, a Democrat in her first year in office, has the option to sign the budgets as written, sign the budgets but issue line-item vetoes over specific expenditures, or veto the bills outright. If the administration is to avoid a government shutdown, the bills would have to be signed by Tuesday, when the next fiscal year begins.
State aid is a major revenue source for charter schools and local governments, which both maintain modest unrestricted reserves and limited operating margins, but local governments have a more diverse revenue make-up so other funds could compensate for a potential loss of state aid, according to S&P.
"Aid is generally distributed in level amounts throughout the year to local governments, so even if one payment is delayed, we feel most could weather the disruption," S&P said. "While charters are funded similarly, we believe there could be greater pressure for these schools as they typically maintain modest unrestricted reserves and limited operating margins, with little room for funding uncertainties."
The rating agency said charter schools receive state aid payments monthly from October through August, on or about the 20th of the month.
Local governments receive payments every other month, on or about the 31st. Government state aid is a mix of constitutional aid and statutory aid. “We understand the constitutional share, which generally is the larger of the two, could still be distributed during an impasse,” S&P said.
The rating agency assigns 28 Michigan charter schools ratings that range from BBB to B-minus. Debt issued by these schools benefits from a state aid pledge agreement. The Michigan Finance Authority reports $199.3 million in charter school long-term debt and $24.4 million in short-term state aid notes secured by an intercept of state school aid.
S&P’s rating is based on the state's commitment to intercept and advance appropriated state aid to the bond trustee, if needed, to cover a payment shortfall.
“Many of these obligations have Nov. 1 debt service payments, and if a budget is not enacted by then, there would be no state aid to intercept, thus eliminating the credit enhancement,” S&P said. “We will continue to monitor progress on the state budget, specifically in relation to these ratings.”
Lawmakers passed a $15.2 billion kindergarten through 12th grade spending bill last week. The school aid budget increases school funding by nearly $400 million. Schools would be in line to receive a $240-per-pupil foundation allowance increase.
Whitmer’s budget proposed $507 million for K-12 schools under a new weighted distribution formula that would provide extra funding for students with more costly educational needs, including at-risk, career tech and economically disadvantaged kids.
State budget office spokesperson Kurt Weiss said earlier this month that debt service payments have already been deemed as essential in the event of a shutdown.
“So those payments will be made accordingly,” Weiss said.
The last shutdown was in 2009. Whitmer succeeded Rick Snyder, who was a Republican working with GOP majorities in the legislature.
Michigan has $6.4 billion of outstanding debt, including $1.5 billion of GO bonds, $3.4 billion of general fund-secured appropriation debt, $677.2 million transportation tax-supported debt, and $728.6 million in unemployment insurance bonds that repaid federal unemployment fund loans and are backed by a tax on employers.
S&P rates the state’s general obligation bonds AA, and appropriation backed debt and state building authority debt AA-minus. The outlook is stable. Fitch Ratings rates the state’s GOs and state appropriation debt AA. The outlook is stable. Moody’s Investors Service rates the GO debt Aa1. Most appropriation debt is one notch lower. The outlook is stable.