DALLAS – The Texas Supreme Court's decision to shut down three years of litigation over the state's "Byzantine" school funding formula should have no immediate credit impact on local school districts, according to Moody's Investors Service.
"Texas ISDs have adapted well to changes in funding levels, maintaining sound financial profiles," analysts John Nichols, Gera McGuire and Naomi Richman wrote in a May 16 report, referring to independent school districts.
"Despite limited revenue-raising flexibility under a property tax rate cap, strong local management teams have shown the ability to maintain healthy reserves during variances in funding levels in recent years," they added.
On May 13, the Texas Supreme Court ruled that the state's school funding system is constitutional, meaning it will remain in place unless the state legislature takes action.
The ruling ended a lawsuit filed against the state by more than 600 independent school districts and overturned district court rulings against the state in 2013 and 2014.
The suit, the sixth in three decades to challenge the funding formula, followed a $5.4 billion cut in school aid in the 2011 Legislature. In the 2013 session, lawmakers restored $3.4 billion, but State District Court Judge John Dietz, a Democrat, upheld his previous ruling that the funding formula was unconstitutional.
Greg Abbott, who was attorney general at the time and now governor, appealed Dietz's ruling directly to the all-Republican Texas Supreme Court.
"The Supreme Court's decision ends years of wasteful litigation by correctly recognizing that courts do not have the authority to micromanage the State's school finance system," Abbott said in a statement.
The lawsuit argued that the legislature failed to provide sufficient funding to meet academic standards and that the funding formula created an unfair disparity between districts with a wealthy property tax base and those that are less property-rich.
On average, about 50% of school funding comes from the state, with the other half from property taxes.
While upholding the constitutionality of the current funding system, the court criticized the system as "Byzantine," saying that Texas school children deserved better. However, the court said that only the state Legislature should resolve the problems.
The Legislature, which meets every two years, will not be in session until January 2017.
The median rating for Moody's-rated Texas ISDs is A1, with about 5% rated below A3. However, most districts qualify for guarantees from the Texas Permanent School Fund that provides an enhanced triple-A rating.
"Potential changes to the school funding system through future legislative actions will impact Texas school finances, but local management teams will likely continue to adapt to ensure operational efficiency and sustainability of their respective districts," analysts said.
