New Jersey school districts face credit risk from state's fiscal stress

Possible budgetary pressures loom for New Jersey’s school districts due to a spillover from state fiscal challenges, according to S&P Global Ratings.

S&P credit analyst Tiffany Tribbitt noted in a report Monday that public school systems in New Jersey will face financial tests if the state seeks to reduce school aid or increase pension contributions that districts pay. While state aid to schools has been relatively flat since the 2011 fiscal year, New Jersey’s fiscal 2018 budget changed funding calculations leading to increased overall funding, but a drop in funds for some districts.

Gov. Chris Christie fought with legislative Democrats about school funding for the current 2018 budget before agreeing to add $100 million for underfunded districts as part of a deal to pass legislation transferring New Jersey Lottery revenues to boost state pensions. The Republican governor will be replaced in January by newly elected Democrat Phil Murphy, who campaigned for increased public school funding.

"Uncertainty remains about how aid will be distributed in the next four years as New Jersey's new governor seeks to restore the state's financial health, although we expect overall school district credit quality to remain stable," said Tribbitt in her report.

Tibbitt stressed that New Jersey districts have by and large adapted to changing financial environments during the last decade with S&P’s ratings on public school systems remaining stable in that stretch. Some of the challenges districts have faced in recent years include a recession, a state-imposed tax levy limit, mid-year aid reductions, and annual school funding largely disconnected from enrollment changes, Tribbitt said.