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Bulletin: Houston Independent School District, TX Takeover By Texas Education Agency Does Not Affect Rating

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Bulletin: Houston Independent School District, TX Takeover By Texas Education Agency Does Not Affect Rating

NEW YORK (S&P Global Ratings) March 16, 2023--On March 15, 2023, the Texas Education Agency (TEA) announced it would be appointing a Board of Managers to the Houston Independent School District (ISD; AA+/Stable), Texas' largest district, following a ruling on Jan. 13, 2023, and made enforceable on March 1, 2023. S&P Global Ratings last reviewed Houston ISD on Feb. 8, 2023, and we were aware of the potential takeover at that time (please see that new sale report here, our summary analysis on Houston Independent School District, published Feb. 8, 2023, on RatingsDirect.

TEA describes two reasons for this takeover:

  • First, Wheatley High School had seven consecutive unacceptable academic ratings from fiscal years 2011 through 2019; and
  • Houston ISD had a conservator assigned for more than two consecutive school years, with one being in place since fiscal 2017.

In our view, although a state takeover for governance reasons usually means challenges in academic performance or internal processes, it does not necessarily indicate a weakening of overall creditworthiness. State takeovers can occur for various reasons, and when financial issues cause a state takeover of a school district or charter school, a rating action is more likely than when governance causes the action.

Although a board-level takeover is undoubtedly serious, the fundamental credit factors, in our view, are unchanged. We will continue to monitor the situation for any implications to the rating.

However, at this time, S&P Global Ratings believes that the rating will be unchanged because:

  • Houston's enormous local economy's strength is generally independent of school district governance issues and can be a source of stability;
  • The majority of revenue (85%) is derived from property taxes, which we view as relatively stable and although enrollment has been declining due to affordability issues and considering any effects of this ruling, state aid revenue at 11% of revenue likely won't cause budgetary pressure;
  • The district has historically maintained very strong reserves and financial operations are carried out by a financial staff that is guided by established financial practices and policies, and day-to-day operations can continue uninterrupted despite governance challenges;
  • Our financial management assessment is based on a district's financial practices and policies and if these are adhered to, credit quality can remain stable;
  • Typically, debt and debt metrics are not negatively affected.

This report does not constitute a rating action.

Primary Credit Analyst:Katy Vazquez, New York (1) 212-438-1047;
katy.vazquez@spglobal.com
Secondary Contact:Joshua Travis, Dallas + 1 (972) 367 3340;
joshua.travis@spglobal.com

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