CHICAGO — Moody’s Investors Service pushed the Detroit Public Schools’ underlying general obligation rating deeper into junk bond territory on Friday, lowering the credit to B1 from Ba2 and assigning a negative outlook due to its weakening fiscal position and the risk of a possible bankruptcy filing.
Moody’s action puts the rating on $5.4 million of school building and site improvement bonds from a 1996 issue — the district’s only GO debt rated by Moody’s — four notches below an investment-grade level. The bonds mature in 2011. The district has additional GO debt that carries ratings tied to the state’s credit.
Analysts said the speculative rating reflects the district’s limited ability to raise revenues, the long-term erosion in the local population that has hurt enrollment levels, a weakened balance sheet, significant deferred maintenance needs, and a heightened risk that the district will seek federal bankruptcy protection.
The district has ended each of the last seven years with substantial operating deficits. In fiscal 2004, it received approval from Michigan to refinance $210 million of short-term state aid anticipation notes pushing out repayment over 15 years.
The move proved a temporary salve as repayment of the notes began in 2007. The district initially reported a $7.2 million balance in 2007 but recently restated its results to show a negative $3.78 million balance. The balance was also negative in fiscal 2008 and preliminary results for fiscal 2009 show a general fund operating deficit of $137 million, which would bring the general fund balance down to a negative $276.8 million in a $1.2 billion budget.
“The negative outlook reflects Moody’s concern that district operations will remain pressured and it may not meet its objective of eliminating sizable accumulated deficits in the near term,” analysts wrote.
The district submitted an updated deficit elimination plan to the state last August and Gov. Jennifer Granholm appointed a team to review it. The team found a fiscal emergency existed and early this year the state’s education superintendent named Robert Bobb as the district’s emergency fiscal manager for a one-year term that began in March.
Bobb has proposed 2,400 layoffs, shuttering 29 schools and the restructuring of 40, partnering with private management companies to advise the district on its high school operations, and called for the renegotiation of staff and vendor contracts.
Bobb is currently working on an updated deficit elimination plan and has floated a Chapter 9 bankruptcy filing as a potential option. Such a filing would be a first for a large, public school district.
“Given the lack of history of municipal bankruptcy, it is unclear which district revenues, assets and debt obligations could be affected by bankruptcy proceedings and that a bankruptcy filing could weaken the district’s ability to meet debt obligations,” analysts wrote.
The strain on the local economy from the recession and domestic auto industry’s woes along with the state’s own budget struggles pose additional challenges to the district.
The district had enrollment of 173,871 students but by 2008 the number had fallen to 106,485, which has cut deeply in state funding aid. That number is expected to fall to 83,777 in fiscal 2010 with a correlating drop of $79 million in state aid expected.