A recent New Jersey Supreme Court decision rejecting a school funding freeze proposed by Gov. Chris Christie for 31 mostly low-income districts is a credit positive for the impacted localities, according to Moody's Investors Service.

The Jan. 31 decision from New Jersey's highest court came on the heels of Christie's bid to reopen Abbott v. Burke, a 1980s court case that led to a series of rulings requiring that the state provide additional aid to 31 specific urban districts. The so-called "Abbot districts" include the state's largest four school systems by enrollment, Newark, Jersey City, Paterson and Elizabeth. Christie had argued that the state's current funding formula has failed to improve educational quality in the 31 districts and has placed a financial burden on the state, which Moody's rates at A2.

Moody's analyst Douglas Goldmacher noted in a Feb. 14 report that while Christie only sought to prevent funding increases and not cut aid, the freeze would have caused "major financial strain." He emphasized that school districts typically need to increase their annual spending plans to address factors such as wage increases and rising energy costs.

"Had the freeze been implemented, districts would have been left with only three options for dealing with the expenditure increases: raising revenue, cutting costs or drawing down reserves,' said Goldmacher in the report.

Goldmacher added that raising revenue through tax increases in New Jersey is a challenge due to the state's 2% cap on increasing property taxes. He said drawing down reserves would have been only a "temporary solution" and caused additional financial distress for districts that generally have small fund balances.

Despite the court decision, Goldmacher cautioned that aid for the 31 "Abbot districts" could change in future state budgets given the state's "strained finances". Christie is scheduled to propose his fiscal 2018 budget on Feb. 28.

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