School district credit warning no surprise

It wasn’t surprising that Moody’s Investors Service issued a “credit negative” warning for Kansas school districts last week. Despite claims to the contrary by GOP lawmakers and Gov. Sam Brownback, the new block-grant funding system is inadequate and inequitable.

What’s more, continued state revenue shortfalls raise concerns about the stability of school funding.

Moody’s said the block-grant system, which went into effect this school year, puts financial stress on school districts.

“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 report also noted that the state reduced its aid for debt service: “Districts that receive bond authorization from voters after July 1, 2015, will be subject to a new, reduced funding formula, effectively placing more of the burden for debt-funded capital expenses on the local constituency.”

The report spotlighted the Wichita school district. It noted that USD 259’s current budget calls for increased taxes, expenditure cuts and use of reserve funds.

“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 – the district illustrates some of the difficulties districts will face under the new legislation.”

The block-grant system essentially freezes state school funding for two years while the Legislature works toward crafting a new school-finance plan. When it was proposed, GOP legislative leaders claimed that it would be good for schools. Sen. Ty Masterson, R-Andover, said that no school should have to cut a planned expense, arguing the block-grant system gives districts the flexibility to cover their expenses.

But districts throughout the state had to make spending cuts to deal with rising operating costs. And unlike under the previous school-funding formula, districts aren’t getting additional money for increased enrollment or for increased numbers of at-risk students.

Moody’s concluded that districts are “financially challenged” by the block-grant system, and that the increased ability to shift funds does not “offset much of the financial impact to a growing district.”

Moody’s isn’t alone in reaching such a conclusion. A three-judge panel ruled in June that the block-grant funding is inequitable and unconstitutional – a ruling currently on appeal at the state Supreme Court.

Though the block grants are supposed to lock in funding to school districts for two years, the state’s revenue problems raise doubts about whether the Legislature and Brownback will keep that promise. Tax collections for the first three months of this fiscal year are already $61 million less than estimated.

The Moody’s credit warning is unlikely to have an immediate impact on school districts but could raise their borrowing costs in the future. Fortunately, Wichita has already issued most of the bonds for its construction projects.

But the warning is a large red flag that the block-grant system is not holding districts harmless and that more financial trouble may lie ahead.

For the editorial board, Phillip Brownlee

This story was originally published October 6, 2015 at 7:06 PM with the headline "School district credit warning no surprise."