CHICAGO — Taking the first step toward a possible state takeover, Michigan officials said Tuesday they were launching an investigation into the “critical and alarming financial situation” of the Pontiac School District.
The district is located in the Detroit suburb of Pontiac, a city that is already under state-controlled emergency management.
In addition to Pontiac, the school district serves two highly rated municipalities located in triple-A rated Oakland County, near the home of Chrysler’s world headquarters.
Like other struggling school districts in the region, many of Pontiac’s problems are tied to a steep drop in enrollment and property values over the last several years. The district also faces a deep deficit, junk-bond ratings, and negative headlines tied to personnel scandals and financial missteps.
A preliminary investigation is the first step in a process that could eventually lead to a state takeover.
Michigan currently has six local governments, including Detroit Public Schools, under emergency management. A recent consent decree signed with the state saved Detroit from a full takeover, but the Motor City now operates under some state oversight.
The Pontiac School District last week slid deeper into junk-bond territory when Moody’s Investors Service downgraded its unlimited-tax general obligation rating to B1 from Ba2. It downgraded its limited-tax GO rating to B2 from Ba3. The outlook is negative.
Moody’s is the only credit agency to rate the district’s outstanding GO debt, which totals $15.6 million.
The district has another $16 million of outstanding tax anticipation notes that it privately placed with a bank in late March.
State education superintendent Mike Flanagan outlined the district’s challenges in a letter Tuesday and said he has withdrawn state approval of the district’s deficit-elimination plan because it was not meeting the goals.
Michigan also withheld its April 20, $1.25 million aid payment to the district. That move helped spark Moody’s downgrade, with analysts saying it presents a severe credit challenge to the district.
Flanagan cited a steadily rising deficit that is expected to total $26 million — or 36% of the district’s operating budget — by fiscal 2012.
A recent audit also has revealed “significant … fraudulent activities” from 2006 to 2010, Flanagan said.
“I have serious concerns about the financial viability of the Pontiac School District,” Flanagan wrote in a letter to the district’s interim superintendant, Walter Burt. “The purpose of this letter is to respond to the critical and alarming financial situation of the district.”
In a statement, Burt said the district plans to slice its deficit by $20 million by next year and that school officials are “very confident” the system will meet the goals of its deficit-elimination plan by June 2013.
The state will begin its review May 7. It has 30 days to complete the investigation and recommend to Gov. Rick Snyder whether he should assemble a formal review team to look further into the books.
The Pontiac district last sold GOs in 2006. Bonds issued in 2006 with a 2121 maturity were yielding 6.75% in mid-April trading, down from 9.1% in early April, according to the Municipal Securities Rulemaking Board’s EMMA website.
Michigan’s move comes a week after a coalition fighting the state’s emergency management law lost a first-round effort to get a referendum on the ballot to overturn the law.
The State Board of Canvassers last Monday deadlocked on whether to approve the group’s petitions, with the dissenters saying the font on the title pages was too small.
If the petitions had been approved, the law would have been suspended until the November election.
The group has said it plans to appeal the board’s decision.