Feb 14 Fitch believes a state district court ruling earlier
this month that Texas' school finance system is unconstitutional may ultimately
result an increased funding and financial flexibility for school districts in
the state, strengthening their credit profile. The judge found the current
funding formula "inefficient, inequitable, and unsuitable and arbitrarily funds
districts at different levels below the constitutionally required level of the
general diffusion of knowledge." The ruling also cites inadequate funding as a
flaw in the current system that violates the state constitution.
We expect the state of Texas to appeal this ruling to the state Supreme Court.
If the Supreme Court upholds the lower court's decision, it will direct the
state legislature to make revisions to the system to restore its
constitutionality. These changes likely will address funding levels in general,
property tax rates, and the distribution of funding among wealthy and less
prosperous districts. Any increase in school funding would be a positive credit
consideration, as the legislature reduced the education budget by $5.4 billion
for the current two-year funding cycle.
If the court decides the current funding methodology is constitutional, we would
expect no credit impact on the districts we currently rate due to these events.