CHICAGO -- In the aftermath of sweeping education finance reforms in Michigan, two rating agencies last week took negative actions against the Southfield Public School system, citing voter rejection of a proposal that would have allowed the district to maintain its current funding level.

The school system in Southfield, a suburb of Detroit, is one of 42 Michigan school districts that already spends more than the maximum $6,500 per pupil grant the state will give a district under the new school financing program.

By law, districts that spend more that the state grant must levy a "hold harmless" tax on property to maintain their current per-pupil funding levels and to ensure a small increase in their budgets for fiscal 1995, which begins July 1.

Rating agency and Michigan school officials view the Southfield school district as a test case for other wealthy districts in the state that must pass millage increases or drastically cut spending under the state's new education financing law.

Steven Murphy, a director at Standard & Poor's Corp., said that the Southfield case is the "first test to voters" to reinstate the millage levy that was taken away by the state's new school funding system.

Allen Short, director of government affairs for the Michigan Education Association, said that about 30 other districts could face problems similar to the Southfield school system.

On April 18, Southfield voters rejected the district's proposed renewal of a 23.884 mills property tax on homestead and non-homestead property.

The school district's property tax levy expired on Dec. 31, 1993.

In the wake of the defeat, Moody's Investors Service downgraded to A from Aa the district's $27.9 million of unlimited tax general obligation bonds that are not qualified for participation in Michigan's School Bond Loan Fund program. The $4.8 million of bonds qualified for the school bond loan program were also down-graded to A1 from Aa.

Standard & Poor's Corp. placed the district's unlimited tax GO bonds on CreditWatch with negative implications. The bonds are rated AA. The action does not affect bonds qualified for the School Bond Loan Fund, according to Murphy at Standard & Poor's.

Both rating agencies took the actions in conjunction with the Southfield district's sale last week of $20 million of unlimited tax GO bonds that are not qualified for the School Bond Loan Fund. The bond issue was insured by Municipal Bond Investors Assurance Corp.

Christopher Bade, an analyst at MBIA, said that the insurer secured the issue despite the negative rating actions because the district is a strong credit with manageable debt. In addition, the school district is located in affluent Oakland County, which has a healthy economy, Bade said.

Southfield school district officials did not return phone calls.

The district will go back to voters a second time with another millage levy proposal on June 13. The Southfield school district spends about $9,400 annually on each student. If voters do not approve the tax, the district will lose $53 million of its $83 million operating budget.

In last week's issue of CreditWeek Municipal, Standard & Poor's said that if the June 13 vote "results in a dramatic reduction in operating revenues available to the district in fiscal 1995, the rating likely will be lowered."

In a credit comment released last week, Moody's said that the defeat of the April 18 referendum "created significant uncertainty regarding the district's future financial operations. Credit risk is clearly increased and bondholder security adversely affected."

Paul Devine, a vice president and assistant director of the Great Lakes regional ratings group of Moody's, said that voter rejection of the "hold harmless" millage on June 13 could spur another review of the district's rating.

"There is no doubt that without a massive change in voter sentiment or some as yet unidentified alternative solution, the district's resources will not even approach a level needed to maintain existing programmatic functions and service levels," Moody's said.

Devine noted that the timing of Southfield's school system's recent $20 million issue was accelerated to avoid a prohibition effective May 1 against the use of bond proceeds for certain purposes, such as technology and some renovations. The prohibition was included in the state school funding law.

Although the Michigan school funding reform plan that was approved by voters in March shifted most of the burden of financing education from local property taxpayers, all school districts will not see a dramatic reduction in their taxes. If the Southfield district renews its millage levy, property taxes there will only decline by about 13%, according to rating agency officials.

The state school funding plan was financed primarily through an increase in the state sales tax to 6% from 4%. In addition, the plan requires all school districts to levy six mills of property taxes and seek voter approval for another 18 mills in taxes on non-homestead property in order to qualify for the state basic grant. Voter approval must also be sought for any additional millage. The plan also diminishes a districts' ability to capture increased revenues from growth in the local tax base.

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