Moody’s issues ‘credit negative’ warning for Kansas schools over Brownback block grants

The international debt rating agency Moody’s on Friday issued a “credit negative” warning for Kansas school districts, saying schools are “financially challenged” by Gov. Sam Brownback’s block-grant funding system.

Moody’s report said the block grant system puts financial stress on school districts, particularly those like Wichita with growing student populations and limited opportunities to raise revenue to serve them.

“Relative to the old school aid formula, this approach potentially disadvantages growing districts because the allocation of funds does not fully take into account enrollment growth,” the report said.

The credit negative doesn’t mean that school districts will see an immediate downgrade in their bond debt ratings, but it is a factor that Moody’s will take into account when rating their debt in the future, Moody’s spokesman David Jacobson said.

Schools’ bond ratings function much like an ordinary consumer’s credit rating. The better the rating, the easier and cheaper it is for them to borrow money for major purchases like new schools or remodeling projects.

Lower ratings generally result in higher interest charges, because the risk for investors is perceived to be greater.

The block-grant system, passed by the Legislature at Brownback’s request this year, essentially freezes funding for two years while the Legislature works toward crafting a new school finance plan. A three-judge school-finance court has ruled that the block grants fail to meet the constitutional requirement for the state to provide suitable funding for education – a ruling currently on appeal at the state Supreme Court.

Under the old school finance formula, a district’s revenue was determined by its enrollment, plus “weightings” providing extra money for poor, limited-English and other harder-to-teach students.

As an example of the stress brought on by the switch to block grants, the report cited Wichita schools’ struggle to fund education for an influx of foreign refugee children, even though the district has raised taxes, cut spending and dipped into reserves to fund this year’s operations.

“The district is facing a squeeze from growing enrollment, increased operating expenditures, and flat state aid,” the report said. “The quandary is not unique to Wichita Public Schools.”

Moody’s also disputed a standard contention of block-grant supporters, who have claimed that it increases flexibility for school districts to move funds around within their budgets to cover critical needs.

“While this offers the opportunity to shift funds to other initiatives, we do not expect it to offset much of the financial impact to a growing district,” Moody’s report said.

In a statement, the governor’s office stood by its longstanding but disputed claim that the state is providing more money for education than it did under the old formula.

“The block grant, providing an historic four billion (dollars) for K-12 education, is a temporary funding measure as Governor Brownback works with legislators and educators to craft a new funding formula that is stable and predictable,” the statement said.

State Rep. Jim Ward, D-Wichita, called the credit negative “another example” of Brownback budgetary failure.

“It’s nothing the districts have done or that they can control,” Ward said. “And the people who are going to reap the consequences of this are the schoolchildren and parents and taxpayers of Kansas.”

Diane Gjerstad, the Statehouse lobbyist for Wichita schools, said the impact on the district itself should be minimal because it has already sold almost all the bonds authorized by voters in the 2008 election.

She also said she wasn’t surprised to see Moody’s raising questions about schools.

“The bond houses have been telegraphing for the last couple of years increased skittishness about (Kansas) state financing and its impact on state government at all levels,” she said.

In April of last year, Moody’s downgraded the state’s bond rating from AA1 to AA2 – from the second-highest rating to third – reflecting concern over a slow recovery from the recession and tax cuts enacted by the Legislature and governor that weren’t offset with spending cuts.

The other major rating agency, Standard & Poor’s, followed in August with a similar downgrade.

Wichita schools have the same AA2 Moody’s rating the state has.

This story was originally published October 2, 2015 at 3:53 PM.