DALLAS – A growing number of Texas school districts are hitting their cap on the tax rate for operations and maintenance costs, which Moody’s Investors Services views as a negative credit factor because it limits their ability to raise revenues amid growing spending pressures.

“Once a district’s O&M tax rate hits the cap, enrollment growth becomes the primary driver of their revenue growth,” Moody’s analyst Kristin Button wrote in an Aug. 30 report. “Relying on enrollment growth could pose challenges for many school districts because there is no guaranty that enrollment will increase; enrollment is somewhat beholden to demographic shifts that are beyond the control of school districts.”

Button cited an Aug. 24 election in Uvalde Consolidated Independent School District, rated A2 by Moody’s, where voters agreed to increase rates on operations and maintenance taxes. The measure is expected to raise $2.4 million, but the district will not have further room to raise O&M tax rates going forward because the new rate is set at the statutory tax rate cap.

Unlike most districts in Texas, however, Uvalde is actually losing enrollment at the rate of 1% per year, Button noted.

“Uvalde has robust fund balances to mitigate near-term pressures resulting from enrollment declines, but their fund balances might not stay abundant over the medium to long term, especially without the ability to raise O&M tax rates any further,” she noted.

Under state law, the O&M tax rate cap is $10.40 per $1,000 of assessed property value, but the cap can be raised up to $11.70 per $1,000 of assessed value with voter approval. The percentage of the 1,024 Texas school districts that have reached the voter-approved cap of $11.70 increased from 9% in fiscal 2009 to 24% in fiscal 2013.

As of the end of 2012, 59% of Texas school districts’ O&M tax rates were at $10.40.  More districts are likely to ask voters to increase the cap above $10.40 in the face of continued expenditure pressures, Button said.

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