Overview

New York school districts have demonstrated relatively stable credit quality in recent years, despite risks prompted by the COVID-19 pandemic. S&P Global Ratings expects credit quality for New York school districts to remain stable in the medium term. The stability is supported by expected modest yet continued economic growth, predominant reliance on municipality-guaranteed property taxes, and strong budgetary performance despite the maintenance of lower available reserves than most out-of-state peers. In addition, we expect continued general stability within this portfolio due to the injection of federal funds resulting from the American Rescue Plan Act, which will likely allow districts to allocate funds across the next one to three fiscal years.

S&P Global Ratings maintains ratings on roughly 332 school districts. Overall, since March 2020 school district credit quality has remained stable, with only two districts experiencing rating movement due to lower reserves and liquidity. Additionally, eight out of the 332 school districts, or 2.4%, experienced an outlook change to negative, while 325, or 97.9%, have a stable outlook.

Tupperlake Central School District's outlook was changed to negative from stable in October 2020, but was returned to stable in May 2021 due to stabilization of its financial operations and reserve funds as of the end of fiscal 2020. Ticonderoga Central School District was both downgraded to 'A' with a negative outlook from 'A+' due to weakened reserve levels after several years of significant reserve drawdowns due to rising expenses and an additional expected use of fund balance in fiscal 2020. Northern Adirondack Central School District was downgraded to 'A-' from 'A' due to reductions in reserves and very low liquidity levels following two years of deficits. All eight credits that were put on negative outlook experienced two or more years of fund balance drawdowns; Wyandanch Union Free School District was put on negative outlook due to the district's deficit fund balance of nearly $3 million at year-end 2019. The ratings of 13 school districts within the portfolio have been withdrawn because of retirement of those entities' debt obligations and 14 new ratings were added.

The onset of the COVID-19 pandemic and the subsequent economic recession created both operational and fiscal challenges for school districts as they transitioned to remote/hybrid instruction beginning March 2020. New York State withheld 20% of its foundational aid to school districts in fiscal 2020, but despite this, most school districts demonstrated an ability to maintain stable finances mainly through significant cost savings on transportation, energy, and extracurricular program expenditures that were budgeted for but did not take place due to the school closures.

Credit Fundamentals

• Stable revenue environment for the majority of school districts, supported by ad valorem taxes and steady state aid
• Participation in well-funded state-wide pension plans leading to minimal to moderate pension liabilities
• Generally strong wealth indicators and good income indicators coupled with strong total reserves
• Low debt as percentage market value and as a percentage of debt per capita
• Access to several broad and regional employment bases primarily via several major roadways and rail
• A moderately improving economy, with solid tax base growth and rising property values

Potential Challenges

• Limited additional revenue-raising flexibility due to the state's levy cap
• Resulting from the pandemic, the state made prompt changes to school aid after districts had adopted their budgets, leading to operational and budgetary pressure for some.
• Low unassigned general fund balances, as required by the state, which leave districts fiscally vulnerable when absorbing changes in budgeted versus state aid allocations or covering expenditures related to unexpected events.

What We're Watching In 2021 And Beyond

The vast majority of New York school districts we rate are located in inland communities, where the most prominent potential environmental risks are snowstorms or minor flooding. Most school districts have fortified their infrastructure to protect against such risks. Governance factors are an opportunity for New York school districts, reflecting that, as of April 2019, districts can establish a reserve for employer contributions to the Teacher's Retirement System (TRS), up to 2% of their total TRS payroll. The state-administered pension plans are generally well-funded, albeit with assumed discount rates that are high, in our view, which could lead to elevated and volatile costs. In addition, New York school districts generally carry elevated other post-employment benefits liabilities, many of which exceed their annual budget, and they are unable to pre-fund contributions through a dedicated trust, which we view as a governance risk. Furthermore, they experienced a spike in retirements in 2020 (966) up from 2019 (578) and 2018 (628). The legislature is considering a bill that would allow school districts to opt into an early retirement incentive program for eligible employees. This incentive could lead to budgetary savings in salaries for school districts. However there have been teacher shortages noted, particularly in rural and urban areas, which could lead to operational challenges. We will monitor how school districts manage staffing needs as veteran and eligible teachers retire.

Spotlight On Environmental, Social, Governance Factors

Our analysis and rating actions considered impacts of the pandemic, which we view as a social factor, however this risk is abating and is not viewed as a material credit factor. Over the longer term, we view social risks for the state as being elevated because the state and surrounding region are disproportionately exposed to declining enrollment and affordability concerns, and a changing teaching workforce.

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