The outlook for Pennsylvania's most financially troubled school districts will remain bleak, according to Moody's Investors Service.
"A fiscal cocktail of rising pension obligations, delayed state reimbursement for capital projects, competition from charter schools and a failure to raise property taxes will continue to push districts into distress," Moody's said in a report issued late Tuesday.
Moody's dropped three Pennsylvania districts to junk this year - McKeesport at Ba1, East Allegheny at Ba3 and Penn Hills at B3. They join the Philadelphia School District, also at Ba3. The four represent one-fifth of the speculative-grade districts Moody's rates nationwide.
Penn Hills, 10 miles east of Pittsburgh, nearly defaulted on its general obligation bonds earlier this year. It received a commitment last month from PNC Bank for a 90-day, $12 million loan.
Moody's in a separate report said the district's ability to borrow only two-thirds of the $18 million its sought to meet payroll and operating expenses for three months underscored the magnitude of its credit pressure.
Moody's has lowered five other districts to low investment grade. Mid Valley, York City, West Mifflin and Frazier are all Baa3, while Trinity Area is Baa1.
"Contributing factors to fiscal stress include past reductions in state aid, inability - due to statutory cap - or unwillingness to raise taxes, and weak Rust Belt tax bases," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.
According to Moody's, required pension contribution rates will increase from 21.4% in 2015 to 32.2% in 2020, while the state owes districts more than $1 billion for capital projects.
Education funding has been a political football in Pennsylvania, with Democratic Gov. Tom Wolf and the Republican-dominated legislature at odds over funding levels.
The fiscal 2016 budget, which Wolf vetoed, is unsigned and three weeks late. Wolf and GOP leaders met for four hours Tuesday, but settled nothing.
Moody's said Wolf's proposed spending plan is favorable for districts, though political battles will probably limit increases.
Wolf proposed a $400 million, or 7%, increase for basic education subsidies and a $100 million, or 9.6%, increase for special education subsidies. He also called for a partial restoration of charter school reimbursements to 10%. Pennsylvania in 2012 eliminated the one-third reimbursement for charters.
"A 7% increase in basic education subsidies and a 10% restoration of charter school reimbursement would be positive," said Moody's. "Yet, some weaker districts are devising budgets with state aid increases that are unlikely to materialize."
Wolf has established a four-year goal to increase education funding by $2 billion, backstopped by a severance tax on Marcellus Shale natural gas drilling, one of many contention points between Wolf and the legislature.
Pennsylvania's public school funding is more subject annual politicking than in other states, said Moody's. "This can make it more difficult for districts to budget and prepare for state aid, which does not necessarily follow need but rather follows the legislature's political will to fund education."
