Key Takeaways
- S&P Global Ratings does not expect President Trump's recent executive order that would eliminate the U.S. Department of Education (DOE) to result in widespread credit deterioration or downgrades, but some kindergarten to 12th-grade (K-12) education providers may experience operating pressure.
- Public K-12 schools currently receive the majority of their annual revenues from state and local funds.
- All 50 states operate their own departments of education and, therefore, determine how school operations are funded. Should federal funding to K-12 schools decrease, we expect that each state will determine its response to the shifts.
- It's uncertain how the details of Trump's executive order will unfold and what that would mean for federal funding to local education agencies. If there are significant federal aid cuts or delays, liquidity--particularly for those schools or districts more dependent on federal dollars--would become increasingly important.
Recent federal policy changes and executive orders from the Trump administration have raised questions and created uncertainty for governments, including K-12 school districts. This unpredictable policy shift also extends to charter schools, which are public schools funded similarly to traditional public-school districts but that tend to operate with less liquidity and lower reserves.
Notwithstanding any potential disruptions from changes to the DOE, in our view, bigger-picture shifts and changes, such as slower economic growth (see our economic forecast published Nov. 26, 2024, or "Growth Prospects Strained After The U.S. Takes The Tariff Plunge," March 5, 2025, on RatingsDirect), significant restrictions on immigration, or the possibility of municipal bonds' losing tax exemption in the Tax Cuts and Jobs Act renegotiation, could have a more wide-ranging effect on all public finance issuers across the country. However, any school districts or charter schools already facing revenue or operational strains could experience deterioration in credit quality and stability.
What's Happening
The majority of public schools' operating revenues is derived from state and local sources, but some dependence on federal revenue remains. Distribution of federal education funding is based in part on income levels, and the amount of operating revenues that school districts receive in federal aid varies significantly. The biggest areas of federal support are Title I, which supports local schools serving economically disadvantaged students, free and reduced lunches, and special education, so a disproportionate amount of federal distributions is to districts with a high population of disadvantaged students. If there is a change in the amount or timing of federal revenues distributed to K-12 schools, S&P Global Ratings will factor the changes into its ratings on a case-by-case basis. In the meantime, while K-12 school districts and charter schools have expended all Elementary and Secondary School Emergency Relief funds, we expect accumulated reserves built on the influx of federal aid in recent years will help schools balance needs and provide support should revenue disruption occur.
Furthermore, most districts and charter schools typically operate on tighter margins and carry less in reserves than local governments. School districts and charter schools with lower reserves and less liquidity could experience a change in credit stability if faced with revenue cuts, although at present we don't foresee anything that would create widespread downgrades.
Chart 1
Why It Matters
While the amount of federal revenue in operating budgets is limited, school districts and charter schools are often heavily dependent on state funding. Therefore, disruption to revenues from the state can quickly impact operations. Should a potential budget reconciliation bill include cuts to Medicaid, states might be forced to adjust school funding to balance their own budgets (for more information, see U.S. States Brace For Potential Medicaid Funding Gaps, published on RatingsDirect March 20, 2025). This means that even if major changes to the DOE move forward without a loss of federal revenues to schools, there could still be problems down the road for K-12 public schools if Medicaid funding to states is cut from the federal budget. As Congress hammers out a budget agreement, the immediacy of this pressure will become clearer. However, we do not anticipate that even if there are major cuts to Medicaid, states would necessarily cut K-12 education funding, given solid reserve levels.
What Comes Next
S&P Global Ratings does not expect the uncertainty caused by policy changes to abate in the near term. However, we expect K-12 public schools can and will start planning for the possible eventuality of changes to any critical technical or administrative funding support provided by the DOE, particularly those that carry higher ratings. We will monitor the response by schools in our K-12 district and charter school universe that are most dependent on federal revenues. If, and when, we see shifts in funding or policies that affect day-to-day operations, we could take rating actions on a case-by-case basis.
This report does not constitute a rating action.
| Primary Credit Analysts: | Jane H Ridley, Englewood + 1 (303) 721 4487; jane.ridley@spglobal.com |
| Sarah Sullivant, Austin + 1 (415) 371 5051; sarah.sullivant@spglobal.com | |
| Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com |
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