Districts’ Borrowing May Face Hit From Continued Financial Crisis

By Michele McNeil — September 25, 2008 3 min read

Even as federal officials and members of Congress struggled this week over a rescue plan for troubled portions of the nation’s financial sector, states and school districts braced for ripple effects that could further threaten their stressed budgets.

The situation could have its biggest long-term impact on districts’ capital projects, as the upheaval in the credit and stock markets threatens to drive up the cost of borrowing money.

And that would be bad news for districts nationwide already feeling the effects of a decline in state tax revenues of various kinds because of the sagging economy. (“State Fiscal Woes Start to Put Squeeze on K-12 Budgets ,” May 7, 2008.)

With investment firms such as Lehman Brothers Holdings Inc. going out of business, and others consolidating, there are fewer buyers for the bonds issued by districts to pay for such projects as new schools and major repairs, according to Susan Gaffney, the director of the federal-liaison center for the Government Finance Officers Association, in Washington.

“The market dynamic is that there are fewer players, and that could drive up the cost of borrowing in the long run,” she said.

In 2007, about $107 billion in education- related bonds was issued.

The financial crisis hit home this week for Laurens County School District 56 in Clinton, S.C., which postponed selling $28 million in bonds on the advice of the district’s financial adviser, said the superintendent, Wayne Brazell. The district planned to try again Oct. 1.

“We have been advised that there will be buyers on that day,” Mr. Brazell said in an e-mail. “We are building a new high school, and we need [the money] to finish the project.”

Another illustration of market volatility: this week a crisis involving money-market funds, which invest heavily in government bonds, temporarily drove up variable interest rates to near double digits, a “very high” level, Ms. Gaffney said. The federal government’s decision to insure those money-market funds gave municipal governments a reprieve, she added.

The credit markets, in general, would likely improve even more for school districts and other borrowers if and when the federal government works out a plan to deal with the troubled mortgagebacked securities at the heart of the current crisis, she said.

Another Fiscal Shock

Meanwhile, the underlying problem— home foreclosures stemming from troubled subprime mortgages— is likely to deliver another fiscal shock to state and local governments early next year, budget experts said.

“We’re just starting to realize what’s going on with the home foreclosures,” said John Musso, the executive director of the Association of School Business Officials International, based in Reston, Va.

Collectively, states have amassed more than $40 billion in budget deficits, in large part because of a drop in tax revenues from the slumping real estate market. At least a dozen states already have been forced to impose targeted cuts on K-12 education programs. (“Hard Times Hit Schools,” Aug. 27, 2008.)

The impact has been somewhat delayed, however, because many homeowners with mortgages prepay their property taxes over time through escrow. As a result, even if a homeowner is foreclosed upon, money may still be in escrow to pay property taxes for a time.

But as those accounts are depleted and property-tax revenue starts dipping even further, agencies that rate the creditworthiness of school districts will take notice, and may downgrade districts’ bond ratings, Mr. Musso added. And that, in turn, may mean districts would have to pay higher interest rates to finance their building projects.

Erica Everett, 18, a senior at Elk Grove High School, checks the news on the stock market during her morning economics class in Elk Grove, Calif., on Sept. 18.

“This could really affect schools’ abilities to pay for their projects,” Mr. Musso said.

Still, some aspects of school finance remain somewhat sheltered from the Wall Street upheaval.

They include employee pension funds, which may see the value of their investments decline but which usually are administered and backed by state governments. In addition, school district operating budgets are funded mostly by state and local tax dollars, rather than federal money. That means they would be relatively insulated from new spending pressures on the federal budget from the financial crisis. (See “Education Budget Roiled by Financial Crisis,” this issue.)

A version of this article appeared in the October 01, 2008 edition of Education Week as Districts’ Borrowing May Face Hit From Continued Financial Crisis


This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Student Well-Being Webinar
Equity, Care and Connection: New SEL Tools and Practices to Support Students and Adults
As school districts plan to welcome students back into buildings for the upcoming school year, this is the perfect time to take a hard look at both our practices and our systems to build a
Content provided by Panorama Education
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Classroom Technology Webinar
Here to Stay – Pandemic Lessons for EdTech in Future Development
What technology is needed in a post pandemic district? Learn how changes in education will impact development of new technologies.
Content provided by AWS
School & District Management Live Online Discussion A Seat at the Table: Strategies & Tips for Complex Decision-Making
Schools are working through the most disruptive period in the history of modern education, facing a pandemic, economic problems, social justice issues, and rapid technological change all at once. But even after the pandemic ends,

EdWeek Top School Jobs

Teacher Jobs
Search over ten thousand teaching jobs nationwide — elementary, middle, high school and more.
View Jobs
Principal Jobs
Find hundreds of jobs for principals, assistant principals, and other school leadership roles.
View Jobs
Administrator Jobs
Over a thousand district-level jobs: superintendents, directors, more.
View Jobs
Support Staff Jobs
Search thousands of jobs, from paraprofessionals to counselors and more.
View Jobs

Read Next

Federal Biden Pick for Education Civil Rights Office Has History With Racial Equity, LGBTQ Issues
Biden selected Catherine Lhamon to lead the Education Department's civil rights work, a role she also held in the Obama administration.
2 min read
Flags decorate a space outside the office of the Education Secretary at the Education Department in Washington on Aug. 9, 2017.
Flags decorate a space outside the office of the Education Secretary at the Education Department in Washington on Aug. 9, 2017.
Jacquelyn Martin/AP
Federal Lawmakers Press CDC About Teachers' Union Influence on School Reopening Guidance
Republican senators asked CDC Director Rochelle Walensky about reports a teachers' union had input on guidance for schools on COVID-19.
3 min read
Dr. Rochelle Walensky speaks during an event in Wilmington, Del., to announce President-elect Joe Biden's health care team on Dec. 8, 2020.
Dr. Rochelle Walensky, CDC director, speaks during an event in Wilmington, Del., to announce then-President-elect Joe Biden's health care team on Dec. 8, 2020.
Susan Walsh/AP
Federal Biden Taps Ex-Obama Aide Roberto Rodriguez for Key Education Department Job
Rodriguez served as a top education staffer to President Barack Obama and currently leads a teacher-advocacy organization.
3 min read
Federal Biden Pitches Plan to Expand Universal Pre-K, Free School Meal Programs, Teacher Training
The president's $1.8 trillion American Families Plan faces strong headwinds as Congress considers other costly administration proposals.
8 min read
President Joe Biden addresses Congress from the House chamber. Behind him are Vice President Kamala Harris and Speaker of the House Nancy Pelosi.
President Joe Biden addresses a joint session of Congress Wednesday night, as Vice President Kamala Harris, left, and House Speaker Nancy Pelosi of Calif., applaud.<br/>
Chip Somodevilla/AP