School districts are experiencing turmoil as the Trump administration tries to dismantle federal funding systems and impose its ideological dictates.
It's creating significant credit risks for K-12 school districts and charter schools, according to Moody's Ratings analysts.
It isn't specifically President Trump's
"Some impacts will be immediate, like the cancellation of previously granted extensions to liquidate pandemic-related aid, while others will unfold slowly, such as federal support for school choice and the curtailing of education research," Moody's analysts wrote.
The education department's personnel cuts, which reduced staff to just under 2,200 from 4,100, included at least 326 positions responsible for the administration of aid programs, according to Moody's. The cuts "raises the risk of an inadvertent disruption in the flow of funds from limited administrative capacity."
For example, Moody's said, the New York State Education Department says it is having trouble getting reimbursed for $363 million of pandemic-related federal aid.
Los Angeles Unified School District Superintendent Alberto Carvalho said a in
"We receive an excess of $750 million earmarked for poor students, English language learners, students with disabilities, and connectivity investments so that students can be connected with their learning, breakfast and lunch programs," Carvalho said.
"The suspension of these funds will impact our most vulnerable students in LAUSD—students with disabilities, low income, English Learners, and even our earliest learners," LAUSD board member Karla Griego said in a statement. "We must stand strong against any efforts to dismantle the public school system and the values it represents."
Those values came under fire again this week through a Department of Education notice
The risk exposure for school districts varies widely, according to both Moody's and S&P Ratings analysts, based on how much federal funding they receive.
The DOE administers the Title 1 program, which provides funding for schools serving low-income students, which will have a greater impact on school districts with a higher concentration of lower-income students, and the Individuals with Disabilities Act, which provides funding for special education, analysts said.
Nationally, federal funds represent about 10% to 15% of all K-12 revenue nationally, Moody's wrote, but there are large variations, with federal aid ranging from 7% to over 20% of total education funding in different states, and even greater variation among individual school districts. Federal aid typically represents a small portion of revenue for charter schools.
Analysts were already weighing the impact of pandemic-era federal funding peeling off.
Some of the school districts used pandemic-relief money to cover operating costs, while others created new programs to deal with learning loss, said Natalie Claes, a Moody's credit analyst.
"The last of the pandemic money was supposed to be spent by Sept. 30, 2024," Claes said.
"There were school districts that had requested extensions from the Department of Education. It's my understanding that is being rescinded," she said.
"We are just now getting audits for fiscal 2024, which shows how they spent those monies," said Lori Trevino, a Moody's credit analyst. "They will have to figure out whether to cut new programs or to continue them and pay with their own money."
Moody's assigned a negative outlook to the traditional K-12 public school sector in December citing slowing revenue, rising costs and student enrollment pressures.
Public school enrollment in the U.S. fell by 1 million students, a 2% decline, between 2013 and 2023, according to a report from the Manhattan Institute, a think tank. The largest declines were in California, New York and Illinois, according to the report.
California K-12 schools received roughly $8 billion in federal funding in 2024-25, which is about 6% of total K-12 funding, according to the
California experienced the seventh consecutive
Los Angeles County is expected to experience the greatest decline with student numbers decreasing by 242,800 over the next 10 years, according to DOF. Placer County, one of 14 counties expected to see enrollment gains over the 10-year period, will see an increase of 6,500 students.
In Washington state, enrollment peaked at 1,115,732 in 2019 and has been
Changes the Evergreen State made to its funding formula in 2019 and restrictions on school districts' ability to levy taxes has increased the number of schools that have fallen under
"School districts in Washington have always operated on narrow margins," Trevino said. "The new program has limited their flexibility over the past several years."
There are six districts on binding conditions; before last year, there had only been three in the history of the program, Trevino said.
School districts are placed in binding conditions if they end the year with a negative fund balance. If the district is under binding conditions for more than two years, a financial oversight committee composed of state and regional officials would be appointed.
S&P Ratings said in a March 24 report it doesn't expect the Trump administration's cuts to the Department of Education to "result in widespread credit deterioration or downgrades, but some kindergarten to 12th grade education providers may experience operation pressures."
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, S&P analysts wrote. "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."
The school districts already had headwinds coming into the year, Sarah Sullivant, S&P's co-sector lead for U.S. local government, said during a briefing with The Bond Buyer staff. The issues around immigration, teacher shortages and the indirect impacts from federal funding cuts are creating uncertainty, Sullivant said.
"We do expect credit impacts on the margins," Sullivant said.
S&P has retained a stable outlook for traditional K-12 schools, because most of the school districts have proven their ability to manage through difficult times, she said.
S&P analysts are evaluating how state pressures might result in them downstreaming to locals, she said.
"Public K-12 schools currently receive the majority of their annual revenues from state and local funds, and all 50 states operate their own departments of education, and therefore, determine how school operations are funded," S&P analyst Jane Ridley said in a March after the executive order. "Should federal funding to K-12 schools decrease, we expect that each state will determine its response to the shifts."
