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Credit FAQ: What The Latest COVID-19 Economic Relief Bill Means For U.S. Public K-12 Schools

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Credit FAQ: What The Latest COVID-19 Economic Relief Bill Means For U.S. Public K-12 Schools

2021 May Look Harder Than 2020 For School Districts

After abruptly closing doors and moving online in spring 2020, eliminating building operation costs allowed many U.S. school districts to end the fiscal year with a budget surplus. Since most districts are funded through a combination of property taxes and state aid--both sources that have held up reasonably well to date—most have enjoyed revenue stability. In addition, federal stimulus to fund the shift to hybrid and/or online models has helped support school districts. Since they generally typically carry fewer reserves than cities and counties, all these factors have helped support stability and likely staved off some credit deterioration in the sector during 2020.

However, pressures remain, including potential changes in the stability of state revenue sharing, as well as enrollment trends. As the 2020-2021 school year moves along, S&P Global Ratings will continue to watch for a shift in stability or overall credit quality brought on by rapidly changing expenditure pressures related to the pandemic.

Frequently Asked Questions

What's in the bill for local school districts?

The latest COVID-19 economic relief bill, signed into law on Dec. 27, 2020, was welcome news for local pre-K-12 school districts. The package provided $54.3 billion for the Elementary and Secondary School Emergency Relief Fund (ESSER)--roughly 4x the amount appropriated in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (see table below). State education agencies are required, at a minimum, to distribute 90% of their ESSER award to local districts. We view this allocation as significant, albeit much lower than $175 billion included in the defunct HEROES Act, and expect it to materially benefit local school districts' credit quality. However, since districts are facing enrollment decline pressure, state aid cuts, and increased expenditures related to COVID-19 in many cases depending on the learning environment, we still expect more downgrades than upgrades in 2021.

How will the $54.3 billion be allocated?

Many states have already released allocations and distribution plans, and overall, we understand the distribution to be similar in form as with the CARES Act funds. Funding will be proportioned based on Title I-A, meaning schools with a higher percentage of students from low-income households will benefit more. In our view, the allowable use of the funds appears to be wide and flexible, potentially resulting in stronger results in fiscal years 2021 and 2022.

S&P Global Ratings is discussing the allocation, timing, and planned use of the funds with district management teams. We expect the additional revenue to provide substantial help for districts' finances, but we note that this is one of many credit factors.

How does the lack of additional relief funding for states affect local school districts?

Notably, the December relief bill did not include any additional direct state and local government aid. Without meaningful additional stimulus, any widespread revenue pressure at the state level is likely to affect school funding formulas as states look to balance their own budgets. Absent additional federal relief, we expect state funding cuts to diminish the positive effects of the increased federal aid to districts and pressure the sector.

Most states held school funding harmless for the 2019-2020 and 2020-2021 school years, but many used reserves and cut other expenditures to balance their budgets. At the start of 2021, 22% of our state outlooks were negative, and if cuts are required to balance budgets, we expect more states to consider reductions in K-12 funding. There were a handful of states that reduced their K-12 funding last year, although for many, the reduction was offset by CARES Act revenue, resulting in a revenue-neutral environment for schools. For example, New York State support for school aid for the 2021 school year was 3.7% lower than in 2020, but when offset by the Federal CARES Act funding, there was a net increase of 0.4%. However, the governor's budget proposal includes $2 billion in school funding cuts, underscoring the shifting sands of school funding in the wake of COVID-19. In the absence of meaningful federal relief for states, we expect many more of them to consider such reductions for fiscal 2022.

Has the COVID-19 pandemic affected enrollment?

COVID-19 has had an uneven effect on local school districts depending on location, school re-opening plans, learning models, and parental preference, but overall, we have seen a decline in local school district enrollment. The declines are especially pronounced at the lower grade levels, where many families opted to keep their children at home or in daycare rather than in a virtual or hybrid school environment. For example, the Michigan Department of Education reported that its statewide unaudited 2020 enrollment count is down 53,200 (3.7%) from the prior year, and kindergarten enrollment is down over 10%. Initial data is also showing larger-than-average declines on a percentage basis in larger school districts. In states where enrollment is a significant factor in the school funding formula, we expect lower pupil counts to further pressure budgets.

However, some states are discussing using 2019 enrollment figures, implementing more frequent or different count dates, and other measures to hold districts harmless for 2020 enrollment declines. We will be watching closely for any changes in funding formulas or adjustments to pupil counts.

How does this affect charter schools?

Charter school enrollment across our rated universe has maintained relative stability during the COVID-19 pandemic as overall flexibility around in-person instruction or greater support for students has helped fuel demand. Despite challenges, charter schools had a better transition to remote learning in the spring than many traditional local schools, and the receipt of federal relief funds helped them offset pandemic-related expenses and maintain financial flexibility.

We expect the December relief bill to help charter schools offset potential near-term state funding pressures. Like traditional school districts, charter schools are public schools that are publicly funded and do not charge tuition. But unlike school districts, charter schools do not have authority to levy taxes and are therefore much more dependent on state funding. Also, they generally receive less funding per pupil than traditional schools. As a result, when per-pupil revenue cuts materialize, the effects are greater for charter schools and could result in more negative rating actions. We expect the additional relief funding will be allocated similarly for charter schools relative to traditional school districts but we are monitoring details as they become available.

In addition to CARES Act funding, many charters were also eligible for loans under the Paycheck Protection Program (PPP). While there is some noted risk with PPP monies if school districts adjust federal funding and net it out, we expect both sources of liquidity to continue to be key in assisting in some financial flexibility for the near term. The ability of schools' management to react proactively and manage expenses accordingly will be critical to maintaining credit quality.

ESSER I And II State Allocations
(Mil. $)
CARES Act ESSER funding allocation Supplemental bill ESSER II funding allocation
Total U.S. 13,229 54,311

Alabama

217 899

Alaska

38 160

Arizona

277 1,150

Arkansas

129 558

California

1,647 6,710

Colorado

121 519

Connecticut

111 492

Delaware

43 183

District of Columbia

42 172

Florida

770 3,134

Georgia

457 1,892

Hawaii

43 184

Idaho

48 196

Ilinois

569 2,251

Indiana

214 888

Iowa

72 345

Kansas

85 370

Kentucky

193 928

Louisiana

287 1,160

Maine

44 183

Maryland

208 869

Massachusetts

215 815

Michigan

390 1,656

Minnesota

140 588

Mississippi

170 725

Missouri

208 871

Montana

41 170

Nebraska

65 243

Nevada

117 477

New Hampshire

38 156

New Jersey

310 1,231

New Mexico

109 436

New York

1,037 4,002

North Carolina

396 1,603

North Dakota

33 136

Ohio

489 1,991

Oklahoma

161 665

Oregon

121 499

Pennsylvania

524 2,225

Rhode Island

46 185

South Carolina

216 940

South Dakota

41 170

Tennessee

260 1,108

Texas

1,286 5,530

Utah

68 274

Vermont

31 127

Virginia

239 939

Washington

217 825

West Virginia

87 339

Wisconsin

175 686

Wyoming

33 135

Puerto Rico

349 1,321
Source: U.S. Department of Education, Office of Elementary & Secondary Education (https://oese.ed.gov/).

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Cora Bruemmer, Chicago + 1 (312) 233 7099;
cora.bruemmer@spglobal.com
David Holmes, Farmers Branch + 214 871 1427;
david.holmes@spglobal.com
Blake E Yocom, Chicago + 1 (312) 233 7056;
blake.yocom@spglobal.com
Secondary Contact:Jane H Ridley, Centennial + 1 (303) 721 4487;
jane.ridley@spglobal.com

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