CHICAGO -- Bond insurers are taking a close look at the Michigan Legislature's action last week to eliminate property taxes to fund school operations, and they are holding open the possibility of not insuring some Michigan school debt in the future.

Some bond insurance officials called the action shocking," while other insurance officials said they will review the impact of the bill on school district credits.

Meanwhile, Standard & Poor's Corp. said yesterday that it would not place any of the approximately 1,300 ratings it has on local government debt in Michigan on CreditWatch because of the uncertainty over what steps the state will take to replace school operating revenues.

The Michigan Legislature earlier this month took the action after failing to get voter approval for long-sought property tax reform over the last few years.

Gov. John Engler is expected to sign the measure into law Aug. 19, according to John Truscott, his spokesman. The delay was forced by millage election changes contained in the bill and the fact some districts had scheduled millage elections for early August, Truscott said.

Engler administration officials hailed the legislation as a historic opportunity to change the way elementary secondary schools are financed in the state, as well as to cut property taxes.

The action eliminated about $6 billion of funding for schools effective July 1, 1994, the beginning of fiscal 1995 for the schools.

Despite the administration's bravado about the bill, public finance officials in the state said they are worried that bond insurers may no longer want to insure school debt in the state.

Gettings Wheels in Motion

Some insurance officials concede that is a possibility, but said no decision has been made.

While the legislation leaves the debt service millage in place for voter approved unlimited tax general obligation debt, limited tax debt issued by schools as well as tax increment debt that is supported in part by schools' operating millages could be adversely affected by the bill, according to public finance officials.

Eric Shapiro, a director at Financial Guaranty Insurance Co., said, "It's clear to me that the Legislature has taken a shocking step to force some movement on how the state of Michigan funds schools."

Shapiro said he has the expectation that the Legislature will replace the operating millage money for schools.

"We're looking at the situation. If we come to the conclusion that debt service is impaired in any way, we'll probably pull back. Thus far, we have not reached that conclusion he explained.

Stephen DeGroat, a vice president and manager of the tax-backed department at Municipal Bond Investors Assurance Corp., said the big question is what kind of revenue replacement plan will come from the state.

He said MBIA insures "several hundred" school credits in Michigan that mostly include unlimited tax general obligations. He said MBIA probably has insured some limited tax school debt, but does not have insurance on TIF debt in the state.

"My feeling is I think we still could look at stronger unlimited tax GO school districts in Michigan," he said. "But we'll probably be more conservative with limited tax debt and probably hold off [insuring it) until we see what develops with the state. "

Charles Silberstein, a managing director at Financial Security Assurance, said the elimination of the operating levy "is causing us to reexamine our attitude towards debt on different layers of the state."

He said the Legislature's action "doesn't do great things for the image of school finance in Michigan. "

"What it does is leaves us all in limbo a bit. And that's never a happy event in the credit markets," he stated.

Silberstein said that most of the school debt insured by FSA is qualified under the Michigan School Bond Loan Fund, which is essentially a state guarantee of the debt. lie said FSA has insured "a modest" amount of TIF debt in the state.

Kate Hackett, a first vice president at AMBAC Indemnity Corp., said AMBAC is evaluating every credit it insures in Michigan as a result of the Legislature's action, which she said caused "fairly significant uncertainty." She said AMBAC insures "a significant amount of credits in Michigan."

Nancy Cherney, senior vice president, secretary, and general counsel at Capital Guaranty Insurance Co., said the insurer has "no concerns at this time." She said Capital Guaranty insures "some" school debt in the state.

Standard & Poor's, meanwhile, is taking a wait-and-see approach. Steve Murphy, a director at the agency, said the effect on credits will depend on what action the Legislature takes.

Ratings at Risk

"To place any specific credits on CreditWatch we think is jumping the gun because we don't know if [the credits] will do better or worse or the same," he said.

On Thursday, officials at Moody's Investors Service said the ratings of 60 school districts in the state are at risk because the Legislature eliminated the operating millage without providing an alternative.

Nick Khouri, the state's chief deputy treasurer, said yesterday that the state has time to put together "a coherent package of bills" that addresses school funding.

It's clearly in the state's interest and in the local interest that bonds will be protected," he said. "The exact mechanism of the new security for the bonds is still in the air." The legislation does not guarantee full reimbursement of the $6 billion loss of operating property tax revenues for schools.

In addition, the state is constitutionally limited in its revenue raising ability. The so-called Headlee Amendment to the constitution limits the state's revenue-raising ability to a percentage of the state's personal income, which would currently allow the state to raise only $3.8 billion more. The amendment also requires voter approval of new taxes.

While the Legislature's action was met with trepidation by school officials, it has won the support of Richard Headlee, author of his namesake amendment and leader of Taxpayers United for the Michigan Constitution.

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