Overview

New York school districts have continued to exhibit stable credit quality over the past several years, in part due to the significant federal stimulus aid received as a response to the COVID-19 pandemic. In total, New York School Districts received nearly $1 billion in temporary federal aid in fiscal 2022. Furthermore, increased Foundation Aid funding for many school districts across the state further supported the overall fiscal health of the portfolio. Given these dynamics, S&P Global Ratings expects credit quality for New York school districts to remain stable in the near term despite a shallow recession predicted for the first half of 2023.

S&P Global Ratings maintains ratings on roughly 323 New York school districts. Overall, since April 2022 school district credit quality has remained stable, with two school districts experiencing rating movement due to strengthened financial position:

• Hamilton Central School District rating was raised to 'A+' from 'A' on strengthened financial position;
• New Rochelle City School District rating was raised to 'AA' from 'AA-' on strengthened financial position.

Additional recent rating actions of note include an outlook revision for Sherburne-Earlville Central School District to stable from negative in November 2022 due to improved reserves; Weedsport Central School District's outlook revised to stable from negative in November 2022 on improved reserves and liquidity. The ratings of 10 school districts within the portfolio have been withdrawn because of retirement of those entities' debt obligations and six new ratings were added. Currently, all 323 of our ratings in this portfolio have a stable outlook.

What We Are Watching In 2022 And Beyond

In 2022, New York school districts realized performance surpluses with the continued assistance of federal stimulus fund injections provided through American Rescue Plan Act and increased state aid for many school districts throughout the state. Consequently, most school districts experienced growth in total fund balance levels across the portfolio. In our opinion, the federal stimulus funding will likely continue to buttress school district fund balance levels over the near term. In addition, consistent with national trends, school district enrollment continues to decrease statewide, with population losses across New York state potentially exacerbating school district enrollment declines. Over the near term, we don't expect consequent changes to the state aid formula; however, we are continuously monitoring changes to school district state aid revenues and will continue to watch for state aid adjustments prompted by enrollment trends or otherwise. Moreover, we are monitoring how elevated inflation and higher interest rates are affecting school district budgets and operations, as property tax revenue growth moderates and costs for goods and services increase, in particular amidst a forecasted recession. However, we believe the state's sustained growth in the semiconductor industry and offshore wind energy may help with future economic stability and expansion. In the longer term, school district budgetary performance and financial profiles will continue to depend on broader and local economic development, which impact local property values and population/enrollment trends.

Spotlight on Environment, Social, Governance Factors

Several New York school districts, have coastal exposure given their location on Long Island. In 2012, Superstorm Sandy caused severe damage to numerous New York communities and disrupted the New York metropolitan statistical area economic engine. Although, in this region, which accounts for a large concentration of jobs and economic output in the states, the materiality of acute and chronic physical risks could vary depending on an entity's proximity to the coastline. However, inland flooding is also common, notably in the Southern Tier and the Mohawk Valley--along flood plains. To address these issues, many localities are performing stormwater management upgrades, along with other infrastructure improvements. The number of communities that participate in the State's Climate Smart Communities continues to grow, which helps communities adapt to a changing climate, and reduce emissions, while providing technical assistance and grants among other assistance, and by extension impact school districts.

We view governance factors as neutral for New York school districts. We view the strong state oversight mechanism as positive. All New York municipalities and school districts are subject to oversight through the State Comptroller's Fiscal Stress Monitoring System, an early warning system for communities and school districts with fiscal problems. Despite these positive governance structure aspects, New York school districts are challenged by their inability to prefund their OPEB. Because state law does not permit a school district to create a trust to fund this obligation, we believe unfunded liabilities, which frequently exceed the size of the respective budgets, will continue to grow unless there are major changes to OPEB or state statutes. We capture the legal and practical impediments associated with pension and OPEB plan governance under the risk management, culture, and oversight governance factor. We consider the strong state oversight mechanism as positive, as all New York municipalities and school districts are subject to oversight through the state comptroller's fiscal-stress-monitoring system, an early warning system for communities and school districts with fiscal problems.

While we view social risks as neutral overall, some regions are experiencing demographic pressures, while others are exposed to affordability concerns, and an aging and depleting workforce within the profession; school districts in rural and economically disadvantaged areas appear to face greater staffing shortages and recruitment difficulties. New York legislators, local school districts, as well as the New York State Department of Education, are exploring ways to implement enhanced recruitment strategies, including incentive pay and increased salaries. In addition, the state's 2023 education budget totaled $40.6 billion, which included a $2.1 billion increase relative to fiscal 2022. While we view increased funding and attention to human capital shortages as positive, we perceive the staffing shortages as an issue that will likely persist at least over the medium-term, which we will continue to monitor.

New York School District Data

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