Fine Print: Wall Street Rating of New Jersey School Districts

S&P issues ratings report on districts’ credit during and after pandemic crisis
Credit: Nattanan Kanchanaprat from Pixabay
The S&P Global report gives a breakdown of state and local support for schools, reflecting the latest proposals from the Murphy administration and the Legislature to maintain flat funding.

Title: New Jersey’s $335 Million State Aid Revisions Could Weaken School Districts’ Credit Quality

Author: S&P Global

What it says: The ratings report dated June 20 from one of the main agencies specifically speaks to the financial health of New Jersey public school districts overall for when they seek to borrow funds for operations, capital or other needs. It provides a breakdown of state and local support for schools, reflecting the latest proposals from the Murphy administration and the Legislature to maintain flat funding of schools, at least for now.

What it means: The report strikes a cautious tone at a time of great financial uncertainty, saying the current plans for flat funding potentially “weaken” the districts’ borrowing power. But it could be worse, as the ratings report is more polite warning than red alert.

Context: Gov. Phil Murphy proposed back in February as part of his fiscal year 2021 budget a $335 million increase in state aid to New Jersey’s public schools, a continuation of his pledge to fully fund the state’s school finance formula over seven years. School aid at more than $12 billion a year is the largest single piece of the state budget. But the COVID-19 pandemic upended those plans, and Murphy in May announced a supplemental budget to carry the next three months that would pull back the state aid increase for now, as well as that for expanded preschool and special education support. On Thursday, the Democratic-led Legislature presented its own supplemental spending bill that largely maintained Murphy’s proposal.

S&P’s take: The ratings report warns that the elimination of the expected increase hurts districts that had planned for the funds in their next school budgets and now will need to find those funds elsewhere in their budgets.

“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.”

S&P financial advice #1: The report cites recent-past history when school aid needed to be adjusted mid-budget, and said that districts would be better off delaying capital projects than taking the money out of critical personnel line items.

“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.”

S&P financial advice #2: New Jersey school districts’ credit is still pretty good, with a vast majority A+ or better. “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.”

S&P question mark: The ratings agency said it would be following developments over the next weeks and months to weigh the financial strength of New Jersey’s school districts going forward.

“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.”