Fitch Ratings believes a state district court ruling earlier this month that Texas' school finance system is unconstitutional may ultimately result an increased funding and financial flexibility for school districts in the state, strengthening their credit profile.

The judge found the current funding formula "inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels below the constitutionally required level of the general diffusion of knowledge." The ruling also cites inadequate funding as a flaw in the current system that violates the state constitution.

Fitch expects the state of Texas to appeal this ruling to the state Supreme Court. If the Supreme Court upholds the lower court's decision, it will direct the state legislature to make revisions to the system to restore its constitutionality. These changes likely will address funding levels in general, property tax rates, and the distribution of funding among wealthy and less prosperous districts. Any increase in school funding would be a positive credit consideration, as the legislature reduced the education budget by $5.4 billion for the current two-year funding cycle.

If the court decides the current funding methodology is constitutional, Fitch would expect no credit impact on the districts it currently rates due to these events.

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