Texas school year starts with tight budgets amid flat state support

Texas public school districts launched a new school year based in some cases on shaky budgets with depleted reserves as they cope with increasing costs, a state per-pupil allotment that hasn't risen since 2019, and the expiration of federal pandemic relief funding.

Still, the overall credit quality for the more than 300 Texas school districts rated by Moody's Ratings remains strong, according to analyst Heather Guss.

"There have been some pockets of pressure and we have had some rating and or outlook changes on some school districts that in some cases were caused by some declining reserves in conjunction with material increases in leverage," she said.

Socorro Independent School District

Flat state funding, along with expenditures that have significantly increased, are weighing on districts, Moody's analyst Grayson Nichols said. 

"We've seen more Texas school districts adopt budgets using reserves than in the past," he noted. "I think that shows you that inflation and just costs are rising quicker than their revenues are."

The Texas Association of School Business Officials' 2024 school finance survey released in May indicated increased fiscal stress. 

While less than a third of the 313 districts that responded to the survey reported a deficit in fiscal 2023, more than half expected to end fiscal 2024 with one.  For fiscal 2025, more than half of the responding districts were anticipating budget cuts, with many also eying the use of fund balances.

Although several districts have been hit with recent downgrades of their underlying ratings or negative outlooks, most school voter-approved general obligation debt is backed by the triple-A-rated Texas Permanent School Fund's bond guarantee program.

Underlying ratings for Socorro Independent School District, which serves about 46,000 students in the El Paso area, were lowered by Moody's and Fitch Ratings. 

Last week, Moody's Ratings downgraded the district, which has about $735 million of GO bonds outstanding, a notch to Aa3 and revised the outlook to negative from stable.

"The downgrade is primarily driven by the district's rapid decline in financial reserves expected in the general fund, which was highlighted by generous personnel salary adjustments, poor financial controls and overestimation of revenue expected in fiscal 2024," the rating agency said, adding finances are expected to stabilize under a state-appointed conservator. 

The Texas Education Agency, which investigated allegations of fund misuse, conflict of interest, and other matters involving the district, appointed a conservator earlier this year to oversee school operations at the request of Socorro's school board.

The district had a general fund deficit of about $42 million in fiscal 2024, which led to a decrease in available general fund reserves from 21% of 2023 revenues "to a weak and below average" 10.5% of projected 2024 general fund revenues, according to Moody's.

In July, Fitch Ratings cut Socorro ISD's rating to A-plus from AA, also with a negative outlook, citing "financial mismanagement, which led to operational imbalances and the use of reserves below the internal policy level of 75 days (roughly 20%). "

Interim Superintendent James Vasquez said insufficient state funding played a role in the district's fiscal woes. 

"It was compounded by the fact that here in Socorro specifically we did see a decline in enrollment, a decline in attendance," he said. "It was just a perfect storm for this. That's why it hit us extra hard." 

There has been a flurry of rating actions targeting Texas schools. 

In July, Moody's placed a negative outlook on the Aa3 rating for the Fort Worth area's Crowley ISD, which has $1.2 billion of outstanding GO bonds, as its reserves declined.  

"Following a larger than expected deficit in fiscal 2023, general fund reserves will decline again by a material amount in 2024 and the 2025 budget was adopted with a modest deficit," Moody's said in a report. 

Moody's downgraded Whitesboro ISD's rating to Aa3 from Aa2 last month, citing "financial deficits in fiscal 2023 and 2024 (projected) combined with growing and high long-term liabilities and fixed costs with plans for additional issuance in the next couple years."

Brenham ISD, located between Austin and Houston, was downgraded in July to A1 from Aa3 as its fund balance fell below 20% in fiscal 2023 and declined further in fiscal 2024. 

Recent actions by S&P Global Ratings included negative outlooks for Everman ISD's A underlying rating due to a trend of operating deficits and for Santa Fe ISD's AA-minus rating due to a decline in reserves. Operating deficits also resulted in a negative outlook for Castleberry ISD's A-plus rating.

Some districts are turning to voters for more money by placing maintenance and operation tax rate hikes on the Nov. 5 ballot.

Austin ISD took action last month to access the ballot to gain an estimated $41 million to fund teacher and staff raises and help stabilize its budget, which is facing a $78 million deficit for the 2024-25 school year.

The school system said stagnant state funding was a major factor in the budget shortfall. In anticipation of a school funding boost during the 2023 Texas legislative session that didn't materialize, the district increased compensation to attract and retain staff after the COVID-19 pandemic.

Facing a $12 million deficit and the need to fund 2% raises for staff, Spring ISD north of Houston is seeking a tax hike that would raise revenue by about $20 million annually.

Rich Saskal

"This increase is not just about maintaining our current level of services — it's about stabilizing our budget in a time of economic uncertainty and ensuring we can provide much-needed raises for our teachers," Superintendent Dr. Lupita Hinojosa said in a statement.

Northwest ISD, north of Fort Worth, is hoping voters approve a $16 million funding increase to address a $15.8 million fiscal 2025 deficit.

Smaller districts are also feeling the pinch. Facing a $4.3 million budget deficit, Montgomery ISD, northwest of the Houston region, is asking voters for a tax rate hike that would generate more than $5.5 million. 

"It's clear that MISD is not alone in facing financial challenges; many districts across Texas are in similar situations," School Board President Dr. Matt Fuller said in a statement. "In 2024, operating costs such as salaries, supplies, insurance, and fuel continue to rise, while state funding for school operations has not kept up — meaning we're dealing with 2024 expenses but receiving 2019 funding."

In the November 2023 election, 85% of districts that held voter-approval tax rate elections were successful, but the passage rate in 2022 was only 55%, according to TASBO. 

Houston ISD addressed a $528 million shortfall by cutting spending, tapping its balance, and other moves when it passed a $2.1 billion fiscal 2025 budget. The projected fund balance is expected to fall to $801 million when fiscal 2025 ends June 30 from $932.68 million. 

The largest public school system in Texas, which is run by a state-appointed board of managers and superintendent, is seeking voter approval in November for a record $4.4 billion of GO bonds.

As school budget woes spread, a group of Democratic lawmakers in the Texas House urged Gov. Gregg Abbott in May to call a special legislative session to increase basic allotment and school safety funding given a projected state budget surplus of as much as $21 billion.

"Texas public schools are facing serious budget challenges from inflation, historic underfunding, and unfunded mandates that will drive drastic budget cuts in ISDs across the state," the lawmakers said. "These issues arise from the state's failure to improve school funding since 2019."

The Republican governor rejected the move, noting the lawmakers voted against a bill during special sessions last year that would have boosted school funding by $6 billion, while enacting a school voucher program.

He blamed the budget shortfalls on enrollment declines or the use of temporary federal pandemic funding for ongoing expenses.

The fact the funding increase was tied to the adoption of a vouchers program, which Democratic and some Republican lawmakers opposed, sank the legislation. Since then, Abbott has thrown his support behind candidates who vow to push for vouchers in the 2025 legislative session. 

An $18 billion property tax cut enacted in 2023 has Texas tapping its huge budget surplus to backfill revenue lost to school districts. Rating agencies warned last year a greater dependence on state funding could make school districts vulnerable to cuts in the Texas budget triggered by economic downturns.