DALLAS - Rising costs and legislative cuts to funding may also result in higher debt ratios for Texas schools, adding strain to underlying ratings, according to a special report from Standard & Poor’s.

“Several districts have opted to issue debt for equipment purchases and maintenance projects that had traditionally been funded with ongoing revenues as a means to free up their operating budgets,” according to the report issued Thursday. “In addition, school districts have also cut costs and, in some instances, have deferred major capital needs for the past two to three fiscal years.”

The report, written by S&P analysts Jennifer Garza, Kate Choban and Horacio Aldrete-Sanchez, notes that Texas lawmakers are unlikely to restore the full funding to the schools they cut in 2011.

The legislature reduced allocations by about $5.4 billion while raising academic standards, a move that an Austin state district court judge ruled in February was unconstitutional. That ruling is on appeal to the state Supreme Court and is not expected to come into play in the current session of the legislature.

“A decision by the Texas Legislature in its current session to reduce state aid allocations for debt service could result in an increase in the direct debt burden for a significant number of school districts rated by Standard & Poor's,” the report added.

With a growing surplus amid a strengthening economy, Texas lawmakers this year are planning to restore about half of the funding cuts from 2011.

Despite the stress of reduced funding since the recession, Texas school districts have proven resilient in adapting to the tougher reality, the report said.

The ratings agency raised its unenhanced rating on 15 school districts, and lowered only one during 2012. S&P affirmed ratings on more than 92% of Texas school districts, indicating that the credit quality of the sector is stable. By comparison, S&P affirmed 89% of school district ratings in all other U.S. states in 2012.

“Should Texas school finances remain such that revenues and expenditures are constrained, we will likely see an increase in applications for financial exigency and increasing debt burdens,” the S&P report said.

For the 448 Texas school districts that rated by S&P, 321 are in the 'A' category and 124 in the 'AA' category.

“Currently, none of the school districts in Texas have a 'AAA' unenhanced rating due primarily to our view of the current school funding system,” the report said.

Most Texas school districts carry enhanced ratings from the Texas Permanent School Fund when they enter the debt market.  The Texas PSF provides triple-A ratings for local bond issues.

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