Moody’s: Detroit public schools’ growing capital needs threaten city’s rebirth

November 20, 2018
The 2016 state bailout solved only part of the district’s problems, ratings agency’s report finds Facility needs are estimated at $530 million, with costs likely to rise. Signs point to need for another state bailout, although political will may be lacking. Without sufficient state support, the growing capital needs of Detroit’s public schools pose a potential threat to the city’s economic revitalization, Moody’s Investors Service said Tuesday.

“Two years after from a state bailout that staved off insolvency, the Detroit Public Schools Community District (DPSCD) is again at a crossroads,” the Moody’s report said. “The bailout strengthened the district’s operations, but the state did not provide sufficient resources to address large and growing capital needs.”

A recent evaluation of the district’s facilities, along with the discovery of high lead levels in the district’s drinking water, has increased the urgency, Moody’s said.

“The district cannot finance capital improvements on its own and the City of Detroit (Ba3 stable) has its own challenges, placing the burden on the State of Michigan (Aa1 stable) to potentially step in again,” Moody’s wrote in the report. “Absent state support, or sizable philanthropic donations, the deteriorating school facilities will hinder the City of Detroit’s post-bankruptcy economic revitalization.”

District Superintendent Nikolai Vitti said in a statement: “As a new administrative and board team we have focused on what we controlled which was the creation of stronger policies, systems and processes to improve our financial condition to support students. The improvement in rating speaks to an improvement in responsible stewardship with an elected, empowered school board. We aligned our budget to a strategic plan through zero-based budgeting. This has created a balanced budget, 10 percent rainy day fund, and strong fund balance. We look forward to a rating that separates DPS and DPSCD. We believe this will move us closer to a rating similar to the city’s.”

The report found:

  • The 2016 state bailout solved only part of the district’s problems. The state responded with a cash infusion and restructuring plan that contributed to surplus operations. However, the district’s financial health is at risk over the next decade due to the projected deterioration of its school facilities.
  • Facility needs are substantial with costs likely to rise. A recent facility assessment commissioned by the district depicts large-scale capital needs, which are poised to grow over the next decade. Needs vary across the district as buildings outside greater downtown more likely to be categorized as poor or unsatisfactory. In August, the district had to shut off drinking water due to unsafe lead levels.
  • Local funding solutions are limited, pointing to the need for another state bailout. The district lacks the resources to afford capital upgrades. Additionally, the district’s ability to access the capital markets at affordable rates is also limited. While the city of Detroit’s fiscal fortunes have improved, it is unlikely to offer meaningful assistance to the school district.
  • The state of Michigan is the most viable source of support for the district’s sizable capital needs, though political appetite so soon after the bailout is uncertain.
  • The district’s unmet capital needs are a potential threat to the city’s economic recovery. High levels of investment have revitalized the city’s downtown, although marked improvement in outer neighborhoods has lagged. Poor facility conditions have the potential to slow revitalization and further limit the prospect of reversing the city’s core credit challenges, rooted in low property values, poor socioeconomic characteristics and persistent out-migration.

Moody’s cited a facility assessment commissioned by the districted and conducted in July by a third-party consulting firm, OHM Advisors. The assessment reported that the district’s 100-plus school buildings in operation have approximately $530 million in capital needs and deferred maintenance. The report projected that the figure could top $1.5 billion by 2023 if not addressed, the ratings agency said.

“Many of the district’s buildings are well past their useful lives,” Moody’s wrote, although it points out that most of the district’s students attend schools in buildings classified as “good” or “fair”. This could change if more capital investments are not made in the coming years, it said.

“Looking to the future, the district must receive appropriate facility funding to reinvest in infrastructure that has been neglected under emergency management,” Vitti said in his statement.

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