Fitch: US States Are Key to Distressed School District Outcomes

NEW YORK--(BUSINESS WIRE)-- The roles that Illinois and Michigan have played in supporting their largest school districts diverge widely and may lead to different outcomes for investors, says Fitch Ratings. We expect school district bankruptcies, like municipal bankruptcies in general, to continue to be rare.

Education is fundamentally a state responsibility that is provided at the local government level. Thus, states typically provide administrative and financial assistance to districts that have fallen into financial distress. However, Illinois' recent treatment of Chicago Public Schools (CPS) has been at odds with this practice while Michigan continues to provide support to Detroit Public Schools (DPS).

Illinois' fiscal 2016 budget is long-delayed and leaves no clear path to developing a plan to support CPS. A recent investigation by the Illinois State Board of Education concluded that the district did not meet the criteria for state intervention, and the governor expressed interest in exploring a bankruptcy filing. In our view, the district's continued dependence on market access for both short- and long-term borrowing would make a debt default appear particularly costly. Fitch's Issuer Default Rating on CPS is 'B+'/Negative.

A California law passed following a school district bankruptcy in the early 1990s is one example of a state's commitment to school district solvency. California, which provides very little assistance to distressed full-service local governments, developed a powerful program in 1991 following the bankruptcy of the Richmond Unified School District. AB 1200 set up county boards of education to oversee school district operations and provide a system of assisting districts in financial distress.

Michigan provides another example. As of Dec. 31, 2015, $13.2 billion of the state's school districts' outstanding bonds are backed by the state via its School Bond Qualification and Loan Program. The governor's proposed budget, approved by the Legislature Wednesday, includes splitting DPS into two entities, one to provide education services and another to repay outstanding debt, most of it backed by a state aid intercept. DPS has had a state-appointed emergency manager since 2009 and still experiences financial stress. However, Fitch believes default for at least the majority of the district's debt appears unlikely.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160610005512/en/

Fitch Ratings
Amy Laskey
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US Public Finance
+1 212 908-0568
Fitch Ratings
33 Whitehall Street
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or
Rob Rowan
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Source: Fitch Ratings

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