CHICAGO — Two years after defaulting on a bond payment, the school district of Pontiac, Mich. has stabilized under state oversight but could go broke by July without additional aid, according to Moody's Investors Service.
"The state's involvement has improved the district's financial management and operations, leading to a full recovery of the missed 2013 debt service payment," Moody's analyst David Levett wrote in a comment published April 9. "Still, the district's challenges remain significant and state oversight has not been sufficient to ensure the district's long-term solvency."
Pontiac's 2013 bond default marked a first for a Moody's rated school district in the country. The district missed a payment of $1.6 million of 2006 limited-tax general obligation bonds. The district altogether has just under $23 million of LTGOs.
The district now operates under a consent agreement with the state. It contracts out its financial management services to the nearby Oakland School District. The has also chipped away at an accumulated deficit with a $10 million emergency state loan and an $7 million insurance settlement, according to Levett.
But an ongoing enrollment decline and other problems persist. The district is on track to run out of cash by July if the state doesn't authorize another $10 million emergency loan, which would require legislative action, Moody's said.
The ratings agency outlined four possible outcomes: the state increases its aid; the state opts to dissolve the district as it has with other struggling school governments; an emergency manager is appointed and recommends bankruptcy; or the district, in the midst of a cash crisis, opts to "prioritize payments" to either maintain operations or pay bondholders.
"If the district chooses to default and fails to implement a repayment plan as it did after its 2013 default, bondholders could suffer losses," Levett warned.
Moody's rates the district Caa1, a deep junk rating that reflects the possibility of another default, Moody's said. The Caa category reflects expected recoveries of 65% to 95%.
In February, it revised its outlook to stable from negative, saying that while the financial condition is very weak, it is no longer deteriorating.
