Michigan said it withheld its April 20 state aid payment to the Pontiac City School District, a move that Moody’s Investors Service warned presents a severe credit challenge to the already troubled system.

The Michigan Department of Education is withholding the district’s $1.25 million payment because it has not provided the state with a detailed budget that meets goals that are part of its recently revised deficit-elimination plan, Moody’s said in a commentary released this week.

“The action is credit negative because it further depletes the district’s already thin cash-flow margins,” Moody’s analyst David Levett wrote. “It is also another indication that the district will likely be unable to achieve its deficit-elimination plan targets.” 

The state plans to withhold the aid until the district makes $13.7 million in cuts, which it is required to do by June 30, the end of the fiscal year. If the district does not make the cuts, the state could launch a review of the district’s finances, the first step toward a state takeover.

The district’s debt service payments should not be at risk, Moody’s said. Even if the state withholds the aid, it will likely release enough money to cover payments on outstanding bonds and notes.

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