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New Jersey's $335 Million State Aid Revisions Could Weaken School Districts' Credit Quality

New Jersey's governor released revised fiscal 2021 school aid proposals on May 28, 2020, in response to budgetary pressure at the state level. The revised total for direct aid to K-12 districts is approximately $335 million (or 3.7%) lower than the original budget proposal. Even though the new proposal still marginally increases overall school aid year over year by approximately 0.04%, S&P Global Ratings believes this revision could weaken school districts' credit quality due to the requirement that districts' revenue budgets and tax levies reflect the governor's higher, original March budget proposal. For districts facing negative aid revisions, the likely effect on credit quality will depend on each district's plan to offset the revenue shortfall.

New Jersey school districts are already required under state statute to operate with lower reserves as compared to national peers, and we believe the downward revision could lead to weakened budgetary performance in fiscal 2021 for districts with lower revised aid distributions. Whether districts with lower revised funding have flexibility to reduce or delay spending during fiscal 2021 will differentiate budgetary performance for the year, and this factor is a key rating consideration. As an example, we believe delaying capital projects may be easier to implement midyear than personnel changes. In fiscal 2019, districts in New Jersey experienced similar aid reductions following the budget adoption process. During that fiscal year, we observed that rated districts were generally able to use dedicated reserves, reduce pay-as-you-go capital, and make other in-year adjustments to maintain stable operations and reserves. For fiscal 2019, 44% of negatively affected districts we rate had negative operating results, compared with 37% in the previous fiscal year.

Chart 1

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Another factor that mitigates the overall negative effect of the revisions is that most of the districts with lower revised aid for fiscal 2021 will still receive year-over-year aid increases as a result of a change in the funding formula for fiscal 2019. Under the May revised proposal, 97% of the districts that will receive lower revised fiscal 2021 aid will still see an increase from fiscal 2020 of about 3.1% on average. Conversely, among school districts that were already expecting lower year-over-year state aid amounts for fiscal 2021, only 6% had their aid numbers revised even lower. However, even if districts are receiving year-over-year aid increases, they will likely now receive less than what was included in their adopted budgets, and they may face overall revenue shortfalls.

In some instances, we expect net negative operating results could pressure liquidity, which will already be lower than normal because of delayed state aid payments distributed following a district's June 30 fiscal year-end. Uncertainty around when districts will receive upcoming state aid payments due to the state's budgetary pressures and the extension of its fiscal year-end to Sept. 30 further complicate cash-flow planning. The governor's proposal for the extended three-month period also includes deferring school aid payments to October from September. For more information, see "New Jersey’s Revised Fiscal 2021 Budget: A Work In Progress" (published June 15, 2020, on RatingsDirect). Expenditure uncertainty for fiscal 2021 further exacerbates these revenue challenges. Requirements to safely open facilities in the fall in light of COVID-19 have still not been finalized, although up to $400 million of federal CARES Act money may be available for additional COVID-19-related expenditures.

We rate 217 districts with lower revised proposed funding for fiscal 2021. Of those, 24 have revised numbers that are more than 10% below the original proposal. Those issuers are listed below in Table 1.

Rated New Jersey School Districts With Revised State Aid 10% Lower Than Initially Proposed
School district March proposal ($) May revision ($) Difference ($) Difference (%)

Atlantic City, Atlantic County

58,241,381 46,004,321 (12,237,060) (21)

Woodbridge Twp, Middlesex County

53,236,803 45,120,821 (8,115,982) (15)

North Brunswick Twp, Middlesex County

28,417,994 24,346,185 (4,071,809) (14)

Lyndhurst Twp, Bergen County

2,854,691 2,495,595 (359,096) (13)

West Long Branch Boro, Monmouth County

476,540 419,692 (56,848) (12)

Merchantville Boro, Camden County

3,961,048 3,507,011 (454,037) (11)

Northvale Boro, Bergen County

399,714 354,486 (45,228) (11)

North Caldwell Boro, Essex County

543,656 482,683 (60,973) (11)

Clifton City, Passaic County

47,942,561 42,623,995 (5,318,566) (11)

Edison Twp, Middlesex County

27,319,478 24,352,536 (2,966,942) (11)

Verona Boro, Essex County

1,709,112 1,527,455 (181,657) (11)

Carlstadt Boro, Bergen County

434,113 388,297 (45,816) (11)

Madison Boro, Morris County

2,009,002 1,797,085 (211,917) (11)

Bound Brook Boro, Somerset County

18,334,869 16,405,506 (1,929,363) (11)

Maple Shade Twp, Burlington County

13,539,313 12,126,140 (1,413,173) (10)

Secaucus Town, Hudson County

$ 2,190,233 $1,962,869 $ (227,364) (10)

Edgewater Boro, Bergen County

$ 1,585,769 $1,422,903 $ (162,866) (10)

Caldwell-West Caldwell, Essex County

$ 2,149,345 $1,929,030 $ (220,315) (10)

Tenafly Boro, Bergen County

$ 2,895,627 $2,599,146 $ (296,481) (10)

North Arlington Boro, Bergen County

$ 4,413,747 $3,965,101 $ (448,646) (10)

Oradell Boro, Bergen County

$ 560,348 $ 503,537 $ (56,811) (10)

Glen Rock Boro, Bergen County

$ 1,938,760 $1,744,154 $ (194,606) (10)

Livingston Twp, Essex County

$ 5,406,315 $4,864,704 $ (541,611) (10)

Monroe Twp, Middlesex County

$ 6,932,427 $6,238,704 $ (693,723) (10)

We maintain generally high ratings on New Jersey school districts, with credit quality supported by strong economic indicators, an economy that had gradually improved during the last decade, and low district pension and other postemployment benefit (OPEB) cost requirements due to support by the state for these contributions.

Chart 2

image

We will examine the likely effects of the school aid revision on our portfolio of rated New Jersey school districts and monitor the following:

  • The level of funding in the state's adopted fiscal 2021 budget,
  • How school districts with revised funding are able to adjust expenditures to maintain budgetary balance, and
  • To what extent the state is able to continue its planned school aid increases in the future.

More broadly, we believe that credit conditions are currently pressured for all U.S. public finance issuers, including school districts nationwide. (See "All U.S. Public Finance Sector Outlooks Are Now Negative," published April 1, 2020). This view partly reflects our expectation that an ongoing economic contraction could increase demand for some public services while also presenting a challenging funding environment. (See "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020.) New Jersey school districts' strong reliance on municipality-guaranteed property taxes lends some stability, although we believe challenges with state aid will continue to weigh on the sector's credit quality.

This report does not constitute a rating action.

Primary Credit Analysts:John Kennedy, New York + 1 (212) 438 2128;
john.kennedy@spglobal.com
Danielle L Leonardis, New York (1) 212-438-2053;
danielle.leonardis@spglobal.com
Secondary Contact:Felix Winnekens, New York + 1 (212) 438 0313;
felix.winnekens@spglobal.com
Research Contributor:Tyler Fitman, Research Contributor, Boston + 657-530-8021;
tyler.fitman@spglobal.com

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