CHICAGO - Reforms in funding for education could have implications for the credit ratings of some states and school districts, speakers said last week at a school finance conference.

The dilemma of fundings quality education without overburdening taxpayers continues to fuel changes in school finance across the country, some speakers said at a conference sponsored by the Chicago Municipal Analysts Society.

Kate Hackett, a first vice president at AMBAC Indemnity Corp., said that reforms may increase the amount of money for schools in some states. However, she said, some reforms, such as property tax relief measures, could make issuing general obligation debt more difficult.

The trend is already prompting school districts to turn to lease financings, which do not require voter approval, Hackett said. However, legislation is pending in South Carolina that would mandate voter approval for lease financings, she said.

While giving school districts an alternative to GO debt, lease financings present financial risks, including the uncertainty of garnering political approval for annual appropriations, Hackett said.

Claire Cohen, executive director of governmental finance at Fitch Investors Service, said that she does not expect to see a trend toward additional state support for education, even though states such as Michigan and Wisconsin have recently embraced the concept.

Financial pressures, including limited revenue raising flexibility and rising costs in such areas as Medicaid, will continue to limit many states' ability to increase their share of education funding, Cohen said.

Instead, states increasingly will offer school districts low-cost help through other initiatives, such as state guarantee programs, she said.

"There isn't enough money in the world to satisfy desired educational funding. And in the still anti-government climate of today, where pressure is for tax relief at the state as well as local level, I'd look for continued reluctance by most states to expand their taxes," Cohen said.

Joseph O'Keefe, a director at Standard & Poor's Corp., said he believes that educational reforms will be addressed in some degree by every state.

While the restructuring of a state's education finance system could be destructive over the medium term, in the long run it could lead to a stronger school funding system O'Keefe said.

Revisions in school district credit ratings are unlikely to occur because of changes in funding systems, O'Keefe said. However, he said, state and local governments could be adversely affected by shifts in revenues that finance the reforms.

Michigan's sweeping school finance reforms, which shifted the predominant share of education funding to the state, was the focus of one session at the conference. The plan, which was approved by voters in March, will be funded by primarily by an increase in the state sales tax to 6% from 4%.

Nick Khouri, chief deputy treasurer for Michigan, said he doubted whether the Michigan initiative would start a trend across the nation.

Michigan, Khouri said, was able to pass the school finance reform plan partly because state lawmakers grappled with reform proposals over the last few years.

"Everyone knew their positions on the issues. Everyone knew the pitfalls. This wasn't a new thing," Khouri said.

Paul Devine, a vice president and assistant director in that Great Lakes regional ratings group at Moody's Investors Service, said that the Michigan initiative raised some credit concerns for the state, some school districts, and tax increment financing districts.

Though the plan eases the property tax burden for most local property owners, state funding for schools, now dependent on the economically sensitive sales tax, is also subject to competition from other state expenses, Devine said.

In addition, because Michigan will spend $6.8 billion on schools in the next fiscal year, it will be close to reaching the revenue raising limit set in the state Constitution, he said.

School districts' loss of control over a large portion of their revenue raising ability will force them to contain costs and live within their means, Devine said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.