Oklahoma school districts must absorb 3% funding cuts with only six months left in the fiscal year, Moody's analyst Adebola Kushimo said.

DALLAS – The Oklahoma State Board of Education's decision to cut 3% from public education funding is a negative credit factor for the state's school districts, according to Moody's Investors Service.

The board voted unanimously Jan. 14 to cut the $47 million non-auxiliary portion of public school budgets as part of the state's adjustment to falling revenues. The state estimates that fiscal 2016 revenues will be 8% below budget, and expects fiscal 2017 revenues to be down an additional 13% versus what was appropriated for 2016.

"The districts must absorb the funding cuts with only six months left in the fiscal year," Moody's analyst Adebola Kushimo wrote. "With monthly state aid distribution, Oklahoma districts will need to adjust current budgets with little time to find offsetting expenditure savings, although the governor gave state agencies advanced warning in October to prepare to cut spending by 10% for the remainder of fiscal 2016 and all of fiscal 2017."

Oklahoma school districts typically receive their revenues from a combination of property taxes and state revenues, Kushimo wrote. Typically, property taxes comprise 35% to 45% of general fund revenues, with the balance coming from the state. The property tax rate has a cap of $35 per $1000 of assessed values for operating purposes.

"We rate 11 Oklahoma school districts, and all are at the millage cap and have no ability to increase property taxes to make up for the cuts in state aid," Kushimo wrote in the Jan. 18 report. "It will also be difficult for the districts to balance their fiscal 2016 budgets by cutting costs. Instructional costs are usually the majority of the budget, and teachers generally have year-long employment contracts."

School districts are further restricted by narrow reserve levels, Kushimo said. When compared to national medians (14% in 2013), Oklahoma school districts maintain smaller reserves. Districts with a revenue base greater than $10 million are subject to a 14% of annual operating expenditures limit on reserve levels, on a budgetary basis. All districts manage their budgets in line with the policy.

"While this is more than enough to absorb a one-time 3% cut, the remaining reserves will provide a smaller cushion to protect against further cuts in 2017 or other unforeseen budget shortfalls, which are expected based on projections by the state's Board of Equalization," Kushimo said.

Moody's lowered its outlook to negative on Oklahoma's Aa2 general obligation rating Dec. 23, after Gov. Mary Fallin's administration  declared a revenue emergency. The Sooner State has been hard hit by falling oil and gas revenue.

"We expect the state to use reserves to address a sizeable structural budget gap going forward," analysts Julius Vizner and Emily Raimes wrote. "Revenues this year have significantly underperformed what was budgeted for fiscal 2016 and are expected to remain weak in fiscal 2017. Contraction in the energy sector has led to labor market weakness in that sector as well as in the manufacturing sector."

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