Some Minnesota school districts face a financial crunch as the expiration of federal pandemic relief funds coincides with rising expenses, enrollment declines and labor contract pressures, S&P Global Ratings warned in a Friday commentary.
"Overall, the credit quality of Minnesota school districts remains stable, with 88% of districts on stable outlook, one district on positive outlook, and 15 districts on negative outlook, primarily reflecting financial instability and declining reserves," S&P said. "In the past year, we lowered 12 school district ratings and raised ratings on six districts."
The credit brief on Minnesota school districts comes on the heels of a Sept. 11 report from the rating agency that listed Minnesota among the states starting to see credit pressure tied to financial imbalances in K-12 school districts.
S&P also flagged Indiana, Louisiana, Pennsylvania, Texas and Wisconsin as having more than 5% of their rated districts on negative rating outlooks in the report, "School's Back In Session And Some U.S. K-12 Public Districts Won't Make The Grade."
In the Friday commentary, S&P said Minnesota districts could start to feel pressure from even marginal growth in salary and benefit costs if state funding levels fail to keep up with inflation.
It cautioned that scenario grew more likely after the state forecast a $3 billion budgetary shortfall for the 2028-2029 biennium.
Other challenges include higher special education costs at a time when state aid is declining; the state formed a commission to identify $250 million in special education cost savings as part of its effort to address the budget shortfall, S&P noted. And the state's rural areas are particularly vulnerable to population decline, which can make financial and staffing pressures worse.
On the upside, S&P pointed to an optional one-time extension of existing operating referendums by school board resolution rather than going to voters, which provides some local revenue flexibility.
And statewide K-12 enrollment trends are stable. However, S&P said, "low population growth could exacerbate enrollment decline and lead to increased costs for districts, as they adapt to declining enrollment and potentially lower state aid."
Minnesota legislators have called for $413 million in education funding cuts to address the budget gap for the 2028-29 biennium. That amounts to 2% of the total education budget.
"We will continue to monitor this situation as a modest slowdown of economic growth could further affect both state and district revenue," S&P said.
The Minnesota school districts on negative outlook include Browerville Independent School District No. 787; Byron Independent School District No. 531; Deer River Independent School District No. 317; Dover-Eyota Independent School District No. 533; Robbinsdale Area Schools; Kasson-Mantorville Independent School District No. 204; Lake Crystal-Wellcome Memorial Area Independent School District No. 2071; and Lake Park-Audubon Independent School District No. 2889.
Also on the list are Lake of the Woods Independent School District No. 390; Minneapolis Special School District No. 1; Nicollet Independent School District No. 507; St Louis County Independent School District No. 2142; Wabasha Kellogg Independent School District No. 811; Wadena Deer Creek Independent School District No. 2155; and West Saint Paul Mendota Heights Eagan Independent School District No. 197.
