DALLAS -- Indiana school districts’ credit ratings may be stable for now, but increased state aid doesn't amount to a long term fix, according to S&P Global Ratings.
Total state aid funding is projected to increase by 1.6% and 1.7% in fiscal 2018 and 2019, respectively. S&P said in a report on Tuesday that the extra cash should be enough to support the credit stability of school districts, but the increase in funds will ultimately be offset by higher costs.
“The true driver of these districts' debt ratings will largely depend on management's fiscal discipline, specifically the ability to structurally balance operations and maintain available cash reserves as a hedge against potential revenue fluctuations,” S&P wrote.
Indiana this year saw its first two takeovers of fiscally distressed school districts by state appointed managers.
The emergency managers will hold broad powers over spending, contracts, hiring, and budgets under legislation passed in April and signed by Gov. Eric Holcomb that put the Gary Community School Corp. and Muncie Community Schools under state oversight.
On Monday, the Indiana Distressed Unit Appeals Board selected MGT Consulting Group as emergency manager from a pool of seven candidates to oversee Gary Community Schools. The district has more than $100 million in debt and $25 million of red ink in its operating budget.
Gary is designated as a distressed political subdivision which specifies the powers and duties of a Gary district EM over finances and academics.
At the end of June, the board appointed Administrator Assistance as the emergency manager for Muncie Community Schools. Muncie is designated a fiscally impaired district and can avoid the more expansive distressed subdivision designation if it quickly repairs its finances. The EM will manage efforts to implement the district’s deficit reduction plan and is charged with the goal of achieving financial stability.
Indiana schools have weaker credit quality than other districts in the U.S. Nearly 98% of the 201 Indiana school district rated by S&P carry investment-grade ratings, and nearly 92% of the ratings have a stable outlook. However, less than 11% of Indiana school ratings are above A-plus, compared with 32% nationally. No Indiana school district is rated at the AA-plus level or higher, and about half of the ratings are A-plus.
“Indiana school districts are generally stable but their credit quality is weaker than that of the median U.S. school district given the widespread use of cash accounting and our view of a lack of comprehensive financial reporting and, on average, weaker financial management conditions,” S&P said.
A lack of fiscal discipline coupled with increasing competitive open enrollment environment will remain a key challenge to maintaining stability, S&P said.