If it succeeds, President Donald Trump's bid to shut the U.S. Department of Education would likely have little to no impact on school district bonds, though it could put added pressure on some charter school credits.
A March 20
While the Department of Education's closure could mean federal funding delays, "the vast majority of funding for K through 12 schools is from the states and the local governments," said Tamara Lowin, senior municipal credit analyst at New York-based VanEck. On average, those two sources account for 90% of K-12 school funding, she added.
It's also important to remember that "almost all of the municipal bonds issued by school districts are secured by a dedicated tax," she said, adding that "the tax revenues for debt service cannot be diverted for operations in the event of any federal funding delays." In addition, school districts typically have sufficient reserves to weather any near-term federal funding delays, she said.
"For traditional public schools, I do not foresee an increased risk of default due to potential delays of federal funding," Lowin said, adding, however, that some charter schools, particularly those that are smaller and have fewer reserves, "could be a little more challenged."
In a Feb. 5
However, the education department does administer grants to K-12 schools, the report said, citing the Title I and IDEA programs as the two largest such programs.
"A school qualifies for Title I funding if a large percentage of students come from low-income homes," the report said. "IDEA (Individuals with Disabilities Education Act) funds and related programs provide money for special education funding."
While getting rid of the Department of Education wouldn't eliminate funding for those programs, closing the department has the potential to create funding delays, the possible extent of which remains difficult to gauge at present, Lowin told The Bond Buyer.
If, for example, the same employees are performing work related to the grants but their email addresses indicate they work at the Department of Health and Human Services rather than the Department of Education, that's likely to mean less disruption than if people who have no experience with administering those programs take over, "in which case there is a higher likelihood of delays," she said. Charter schools operating on thin margins would be particularly impacted by such delays, Lowin said.
"A lot of charter schools are focused in areas where they rely more upon IDEA and Title I grants," she said.
Jeffery S. Timlin, a managing partner at Austin, Texas-based investment management firm Sage Advisory, where he heads the municipal department, said shutting the Department of Education would likely have "zero effect" on bonds issued by K-12 school districts.
"For the most part, they're insulated from anything on the federal level as it pertains to bondholder security," said Timlin, who also noted that those bonds are backed by local property tax receipts.
Still, perception can sometimes become reality, he said. It's conceivable that there could be some market disruption relating to K-12 bonds if investors believe that closing the department will bring elevated risk, "but I highly doubt that," Timlin said.
Like Lowin, Timlin believes that any potential delays in federal education funding could potentially impact charter schools. While some charter schools have multiple facilities, most are small and "they don't have the same type of dedicated revenue streams that public schools have .. so they could be more reliant on ancillary revenue sources," he said
"They're riskier credits anyways," Timlin said, adding that, unlike K-12 school districts whose funding sources tend to be "more homogeneous," charter schools are "more like snowflakes," and the mix of revenue sources they rely on can vary widely.
Consequently, while there is potential for federal funding delays to impact charter school credits, the degree to which a particular charter school would be impacted "is hard to quantify," he said. However, "if you have charter school bonds, you'd probably want to do a deeper dive than you would normally."
President Trump's March 20 executive order also tasks the education secretary with ensuring "that the allocation of any Federal Department of Education funds is subject to rigorous compliance with Federal law and Administration policy."
That includes the requirement that programs or activities receiving federal assistance terminate "illegal discrimination obscured under the label 'diversity, equity, and inclusion' or similar terms and programs promoting gender ideology," the order said.
While acknowledging that he didn't know of a specific example, Timlin said that if there were a charter school whose whole program – or a major portion of it – was dedicated to a DEI initiative, the president's executive order could spell trouble if the school relies on federal funding.
The order directs the secretary of education "to the maximum extent appropriate and permitted by law" to take steps to close the department, noted Elleka Yost, director of advocacy and research at the Association of School Business Officials International, who said closing the Department of Education would require an act of Congress.
"Moreover, the EO is being legally challenged by several advocacy organizations, so we can't truly assess the impact at this time until we learn more information about how this order would be implemented," Yost said in comments emailed to The Bond Buyer.
The president's executive order aside, a March 28 letter to "State Chiefs of Education" from Secretary of Education Linda McMahon brought news regarding pandemic recovery funds.
"'Shocked' does not begin to describe our reaction when we received the notification late Friday evening that the U.S. Department of Education had immediately rescinded reimbursements to states and districts for approved pandemic recovery funds," Maryland State Board of Education President Dr. Joshua Michael and Maryland State Superintendent of Schools Dr. Carey M. Wright, said in a statement issued Monday.
For the Maryland State Department of Education and Maryland school systems "this jeopardizes over $400 million in funding and represents 11 percent of the $3.2 billion in pandemic recovery funds distributed to Maryland," their statement said.
