Overview

Texas school districts continue to demonstrate stable credit quality, remaining resilient through economic uncertainty and disruptions. Therefore, S&P Global expects Texas schools' credit quality to remain comparatively stable in the near term. Underpinning our assessment are expanding tax bases, stable to growing enrollment, as well as predicable state funding, with districts typically maintaining very strong reserves.

S&P Global Ratings maintains general obligation (GO) ratings on 612 Texas school districts. The credit quality of Texas school districts is evident with 99% on stable outlook and less than 1% of credits on negative outlook. In addition, 2% of Texas school districts experienced rating movement, excluding outlook changes, on their general obligation (GO) debt, since Jan. 1, 2022 (through Feb. 22, 2023)--three downgrades and seven upgrades. Furthermore, there were seven outlook revisions, most from stable to negative.

What We Are Watching

Based on the state funding formula, which is driven by weighted average daily attendance and wealth equalization, funding has been historically stable and predictable. State funding remained constant through the pandemic, despite statewide enrollment declines. School districts have recovered students in the most recent year, and while we expect to continue to see stabilizing enrollment figures in the coming years, long-term enrollment trends will likely shift, given a change in overall demographics and lower birth rates. Potential for a school choice program could lead to increased competition from private schools, further contributing to enrollment declines. However, rapidly growing districts will continue to face challenges, particularly those with infrastructure needs and high debt profiles.

In fiscal 2022, Texas had a surplus of $32.7 billion, and proposed legislative changes could lead to changes within state funding for schools. As lawmakers determine the potential use of the state's record surplus, discussions of higher per-pupil funding or funding based on enrollment count (compared with the current formula based on average daily attendance), could have a positive effect on funding for districts with stable or growing enrollment. However, potential for property tax rate cuts stemming from increased local homestead exemptions could result in reduced local funding for schools. Despite this, we anticipate continued overall stability in the Texas school district portfolio for the biennium ending in fiscal 2025, as the legislative outcome will likely be neutral for most districts within the state.

Spotlight On Environment, Social, Governance Factors

ESG Overview

We believe that the state has elevated exposure to physical climate risks stemming from periods of prolonged drought, wildfires, hurricanes, storm surge, and intermittent flooding events. Elevated environmental exposure varies by region, and our analysis incorporates each issuer's mitigation plans. Texas schools along the Gulf Coast could be challenged with enrollment declines and revenue weakness should hurricanes and flooding cause permanent student displacement or property damage resulting in assessed valuation declines, extending well beyond one-time repair expenses. In our view the costs to recover and remediate might escalate and present additional risks for public schools, their students, and the state. Climate transition risks in certain areas of the state could pressure local economies and revenue collections as changes in federal regulations pertaining to carbon emissions and the transition to renewable energy could adversely affect the oil and gas industry over time, thereby pressuring the local economic bases that rely on the energy industry.

The state's population is projected to continue its growth trajectory, positioning it to maintain robust economic productivity and activity compared with its peers. The state's demographic trends, outpacing the U.S. over the past decade, are positive and underscore economic activity and property tax revenue that helps fund school operations, which could present a social opportunity. However, we consider the schools' social factors as neutral, given the increasing requirements for operations and substantial amount of debt issued to keep up with infrastructure needs, which could be a social risk.

We consider governance factors to be neutral to Texas schools overall credit quality; the state dictates financial budgeting, reporting, regulation, and transparency standards for school districts.

Texas School District Data

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