Dive Brief:
- The education sector's credit quality overall remains strong, but wage inflation and staff shortages are adding pressure on K-12 leaders to keep their school systems fiscally healthy, said Fitch Ratings in a paper posted to the credit rating company's website.
- To help keep their credit worthiness stable, school systems should have long-term funding plans, recurring revenue and a plan to become more competitive with the private sector in compensating staff, the credit rating agency said.
- Financial K-12 forecasters have warned school systems that the period of budget growth created from federal emergency aid could be followed by a fiscal cliff unless preempted by strategic planning. However, some budget impacts, such as decreases in student enrollments and rising inflation rates, may be uncontrollable.
Dive Insight:
A district's credit rating is an indicator of fiscal health and is taken into consideration when school systems seek loans and refinance debt. Higher credit ratings could result in lower interest rates for loans. Several independent companies provide credit ratings to school systems, including Fitch Ratings, Moody's, Standard & Poor's and Kroll Bond Rating Agency.
"You have to have one [a credit rating] as a school district, and it's imperative that you have a good rating, because that means that you're being fiduciarily responsible for the funds that the public has bestowed upon you as a fiscal agent," said Sharie Lewis, director of business services and operations for Parkrose School District in Portland, Oregon.
Labor stressors, such as staff shortages exacerbated by the pandemic and an anticipated tight post-pandemic labor market, could compel school systems to increase wages where possible, the Fitch report said.
In the past 10 years, the gap widened between wage growth in the private sector versus that in public K-12 education, the report said, culminating in the first quarter of 2022 showing the largest difference in that time frame.
Although school system job openings and resignations are trending below those in the broader economy, districts have less flexibility than the private sector to adjust compensation, as school boards must approve such changes and those policies typically remain in place for an entire school year, said Ashlee Gabrysch, director at Fitch Ratings and author of the report.
This puts school systems in a unique position compared to local and state governments that have more options for independently raising revenue.
"Generally speaking, a city has more flexibility in increasing their revenues so that they can then increase their spending," Gabrysch said.
Overall, school systems seem to be in a stable place right now, she said. "We're not seeing the credit quality of school districts really be diminished, especially because they're so flush with cash."
A time to worry would be if a school system is using one-time revenues for investments that aren't sustainable, Gabrysch said.
Most school system revenues come from property taxes and state funding based on student enrollment. Districts typically don't have the ability to raise revenue like companies in the private sector can, said Lewis, who is also legislative advisory committee chair for the Association of School Business Officials International.
Enrollment in many districts, including New York City and Chicago, has dipped during the pandemic, causing school systems to weigh whether they can continue paying for programs and services that were based on higher enrollment levels.
Because of these challenges, school system leaders are examining ways to keep their finances strong, Lewis said.
School systems, for instance, are researching why their enrollments fell and working on regaining parents' trust in efforts to build up their student populations. They are also making adjustments to balance revenues with expenditures. In addition, efforts are underway to recruit and retain staff, she said.
The Parkrose School District, like several others across the country, has a grow your own program to support nonteaching staff and community members on their paths to becoming educators, Lewis said.
"You can't get any better than watching somebody go from here to there," Lewis said.
