How Washington's Education Funding Reform Could Affect School Districts

PHOENIX - The credit implications of Washington State's funding overhaul for K-12 education hinge on how any solutions the state adopts affect each district's revenues and flexibility, S&P Global said in a new report.

Washington lawmakers, along with its Gov. Jay Inslee, appear set to try to solve the state's K-12 funding needs as they begin work on a new biennial budget in January. The matter is urgent because in 2012 the Washington State Supreme Court, in McCleary v. State of Washington, found that the state had failed to meet its constitutional duty to provide adequate funding for basic education. The court further ruled that many school districts' practices of relying on voter-approved excess levies to support basic education was unconstitutional. In 2014 the court found the state in contempt for failing to submit a plan to address the McCleary ruling.

The state legislature created an education funding task force earlier this year that is working under a statutory requirement to develop recommendations to finalize compliance with the McCleary decision by next month. Inslee is proposing to fully fund the state's K-12 education system with one of the largest K-12 education funding packages in state history: a roughly $2.7 billion package of state money sent to local school districts.

As outlined in his proposed budget earlier this month, Inslee would use tax code changes and new taxes to raise money for education that would allow districts to stop relying on levies.

How this will affect individual school districts and their bondholders is both a matter of policy and of the individual district circumstances, S&P said.

"We anticipate that a solution that seeks to eliminate school districts' reliance on local levies to fund basic education by raising state funding is likely to have neutral to positive credit implications if the legislature doesn't significantly curtail local levy authority," the rating agency said.

"A significant limitation of districts' authority to raise revenue through locally controlled excess levies could have neutral to negative credit implications for some districts, depending on a district's rate, tax base, and reliance on local levies," S&P added.

"We have observed high-income Seattle-area districts to be most likely to approve levies during the past 20 years; state data also show supplemental levies in place in some rural districts with large tax bases relative to their student populations," the agency noted. "For districts that have historically relied on supplemental levies, a reduction in local levy flexibility or availability could partially or fully offset the positive credit effects associated with higher state funding. For districts without supplemental levies, a more prominent state funding role appears likely to positively affect credit quality by boosting operational revenues."

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