• Michigan lawmakers need to find compromise within two months
  • Without such a fix, bondholders are increasingly at risk

The deteriorating finances of Detroit’s public schools may result in a bankruptcy filing if Michigan lawmakers don’t agree on a rescue package within the next two months, according to Moody’s Investors Service.

The state’s House of Representatives last week approved a plan to restructure the cash-strapped district that has “stark” differences with the package approved by the Senate in March, Moody’s said in a report on Monday. The school system, which is rated Caa1, seven steps below investment grade, will soon run out of money. The $50 million of emergency funding that the state appropriated in April is supposed to last only through June.

“The legislature now has less than two months to compromise on a reform package or the district’s financial position will possibly force a bankruptcy filing,” Moody’s said in the report. “Failure to implement a solution increases risks to all of the district’s bondholders.”

While Detroit resorted to bankruptcy in 2013 to escape from its debts, the independent school district wasn’t affected and is struggling with a drop in enrollment that has cut into its revenue. The district’s emergency manager would need to recommend a Chapter 9 filing and Governor Rick Snyder would need to approve it.

Were a bankruptcy to occur, the holders of the district’s general-obligation debt should be unimpaired because the securities are backed by the state’s school-bond program, according to Moody’s. Holders of state-aid bonds are “at risk” because debt service is paid from state funds that would otherwise go toward operations, Moody’s said in the report. In fiscal year 2017, debt service on state aid revenue bonds is $105.3 million.

“Without an infusion of a significant amount of additional cash beyond the district’s existing short-term borrowing authority in fiscal 2017, it would be highly unlikely that the district would have resources to make payroll and debt service throughout the year,” Moody’s said.

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