Inflation woes linger for education sector, Moody's says

Rising costs, particularly for wages, are pressuring K-12 school districts, colleges and universities, possibly leading to strained budgets, credit negative responses and labor strife, according to Moody's Investors Service. 

While inflation growth has slowed, its effects linger. The consumer price index was up 3% from June 2022 to June 2023, marking the smallest 12-month increase since the period ending in March 2021, according to the U.S. Bureau of Labor Statistics.

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Wages — generally the largest expense for school districts — are being pushed higher by cost-of-living increases and a nationwide teacher shortage, Moody's said in a report this week, adding the financial impact depends on how districts generate their revenue.

Schools reliant on state aid face the risk that funding doesn't keep up with rising costs.

"However, states have generally increased their 2022-23 funding for school districts above inflation, and budget proposals for fiscal 2024 indicate healthy increases," the rating agency said. "For districts that rely on property tax revenue, on the other hand, limitations on property tax levies or millage rates may hinder their ability to respond to rising operating costs."

It noted that of the 14 states where districts rely more heavily on property taxes as opposed to state aid, 10, including Texas and New York, face some sort of limitation on the property tax levy or mill rate.

"School districts that are unable to raise revenue to cover growing costs may eventually have to use reserves to cover the difference, which would be credit negative," the report said.

Texas schools are reportedly scrambling to boost teacher pay after legislation for state-funded  raises failed to pass during the legislative session that ended May 29. The state, which has the nation's largest teacher labor market, has been hit with wide-spread educator shortages.

Inflation is driving up school construction spending amid growing material and labor costs with the producer price index for new school construction rising 31% since January 2020, according to the Moody's report. 

Escalating costs for labor, food, utilities, and construction are pressuring the higher education sector. 

"Wage stagnation and benefit reductions over a multi-year period during the pandemic have contributed to pent-up demand in compensation, which in the U.S. is manifesting itself in labor strikes and other collective bargaining actions," Moody's said.

Amid rising borrowing and construction costs, many universities have put shovel-ready projects on hold, while some bond-financed student housing projects are using 40-year amortization rather than the typical 30-year to make projects more financially feasible, according to the rating agency.