Overview

Pennsylvania school districts weathered the operational and financial pressures of the COVID-19 pandemic well and remained resilient, in most cases, due to largely stable tax bases and consistent state aid funding. S&P Global Ratings expects credit quality for the vast majority of these districts will remain stable in the near term. Credit stability is supported by:

• Better-than-expected financial results in fiscal 2020 despite the pandemic and economic recession;
• A $200 million increase in state aid in fiscal 2022, with an additional $100 million earmarked for the commonwealth's low-income schools;
• Continuing revenue from the U.S. government from the Elementary and Secondary School Emergency Relief (ESSER) fund through multiple stimulus acts; and
• At least adequate fund balance levels for the majority of school districts in Pennsylvania.

S&P Global Ratings maintains ratings on 314 school districts. Overall, the credit quality of school districts in the commonwealth remains stable, with 22% experiencing rating movement since July 1, 2019 (through June 30, 2021). In 2020, 34 districts had negative rating actions on their general obligation (GO) bonds. In addition, 88% of the ratings have a stable outlook and 12% have a negative outlook.

What We're Watching

Stable Funding Sources Help Offset Other Challenges

School districts in Pennsylvania continue to face many financial challenges, including, but not limited to, high fixed costs stemming from rising cyber/charter school tuition, special education costs, and pension contributions. These financial pressures will remain even as the pandemic abates, in particular cyber/charter school tuition reimbursement. Proposed policy changes to the funding of cyber/charter schools failed to materialize in any legislative action the past two years.

OPEB costs continue to be a source of credit pressure for Pennsylvania school districts, often representing nearly 15% of a district's budget. As of June 30, 2020, the Public School Employees' Retirement System (PSERS) was 54.0% funded. Districts receive some financial support from the commonwealth for their pension contributions. While there were no changes in pension funding from the state in the fiscal 2022 budget, we will continue to monitor PSERS funded ratios as well as potential adjustments in support from the commonwealth, as any changes could put additional financial pressure on school districts. While it remains unknown how the ongoing FBI investigation into PSERS of alleged kickbacks and bribery might affect school districts, we will continue to monitor the investigation to determine the financial impact, if any at all, on future pension costs for districts.

State Support Bodes Well For Stability

Lawmakers increased funding for public school districts in fiscal 2022 by $200 million, with an additional $100 million earmarked for the commonwealth's low-income schools, the first increase since fiscal 2020. Districts that are reliant on state aid to fund kindergarten through 12th grade (K-12) education could face budgetary pressure in the near term as employee salary and benefits continues to rise. We expect local sources, which are mainly made up of local property tax revenue, will remain stable in the near term. However, reliance on EIT could adversely affect finances in communities where economic recovery from the pandemic is slower than average.

Increased school funding in fiscal 2022 is a welcome change after the flat funding from the commonwealth in fiscal 2021, which was particularly acute for districts with weaker wealth levels and reserve positions, as revenue options are limited partly as a result of the Act 1 Index. For districts with lower wealth levels, state aid can be more than half their total revenue, and these districts might encounter budgetary pressure. However, we expected federal funding from the CARES Act, Consolidated Appropriations Act, and American Rescue Plan (ARP) Act will provide financial stability for most commonwealth districts over the next 12 to 24 months.

Managing Property Tax Rate Will Be Important for Credit Stability

We expect the financial impact of the pandemic and lagging economic recovery to vary--each district's revenue mix will be the largest factor in their short- and long-term stability. Districts with higher property wealth levels are less reliant on state aid to provide K-12 education services, and therefore, are less vulnerable to future budgeting of the commonwealth's education funding. However, failure to raise property taxes in the short term could result in budgetary pressure in the long run due to the Act 1 Index, which under Pennsylvania commonwealth statute restricts a district's ability to raise the tax levy higher than a certain index, which the Pennsylvania Department of Education determines.

Spotlight On Environment, Social, And Governance Factors

We view Pennsylvania school districts' environmental risks as in line with the sector as a whole. However, we believe some districts face some increased exposure from inland flooding hazards and enrollment declines. We also view Pennsylvania schools' exposure to social risks as in line with that of other U.S. states. We consider a district's social risks on a case-by-case basis, often determined by a district's wealth and income indicators, which could be a credit strength or a weakness compared with those of other commonwealth schools. Most school districts' governance risk is limited, and therefore in line with that of the sector, because management of most districts is at least adequate, in our opinion. Historically, the commonwealth showed poor pension funding discipline and assumption choices, which resulting in elevated and, at times, volatile costs. However, we believe the impact for school districts is mitigated as the state contributes approximately half of districts' pension and other postemployment benefits.

Pennsylvania Schools Data

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