School fiscal challenges are pressuring bond ratings

Credit pressures on public education, from K-12 school districts to major universities, are intensifying, leading to a recent surge in negative bond rating actions.

K-12 school districts accounted for 70% of all Fitch Ratings' downgrades and negative outlook revisions over the past 12 months, said Senior Director Karen Ribble, pointing to a March 19 report she co-authored.

The pace of negative rating actions for school districts in 2026 is similar to last year with seven of 11 negative actions in the tax-supported sector between January and April 28, Ribble said.

Enrollment and daily attendance, which are key revenue drivers, have declined due to weak demographic trends, immigration policies and rising competition from charter schools and voucher programs, Ribble said.

Aside from birth rates, there is competition from voucher programs in some states, including Texas and Florida, states that recently opened "school choice" programs, she said.

Most of the evidence related to the drop in student attendance has been anecdotal, but Ribble said even if attendance rates dropped for just a month it would affect the amount of state funding the school district would receive. Schools also attribute some declines to international immigration slowing, but it's hard to track how many fewer students who are the children of potential migrants are not attending.

Though K-12 school districts make up a significant amount of downgrades, the number in the first four months of 2026 is not higher than the same four-month period in 2025, Ribble said.

Between June 2024 and June 2025, S&P Global Ratings' negative rating and outlook revisions for K-12 public school districts rose markedly, with the number of negative outlooks rising 40% during this period, according to a September report.

"As states face more fiscal pressure from expenditure increases outpacing revenue growth, K-12 districts that rely on state funding will be in an increasingly precarious position," S&P analysts Jane Ridley, Sarah Sullivant and Sabrina Chiang wrote in the report.

They also cited the burning off of COVID-era stimulus money as a factor in reducing flexibility related to revenue.

"After several years of largely stable credit quality, many school districts around the U.S. are starting to experience credit pressure tied to financial imbalances," the S&P trio wrote. "This is particularly acute in Indiana, Louisiana, Minnesota, Pennsylvania, Texas and Wisconsin, where negative rating outlooks on school districts in July 2025 made up more than 5% of rated districts, and in Kansas, Missouri, Oklahoma and Pennsylvania where downgrades in the past six months outnumbered upgrades more than 21 (compared to with 1:2:1 nationally."

While the headwinds are widespread, regional outcomes vary.

In the past few weeks, Fitch has downgraded the Sacramento City Unified School District and placed it on negative watch and lowered its outlook for the Los Angeles Unified School District.

In Washington, Moody's Ratings reported 24 downgrades and no upgrades in the state's K-12 sector over the last 12 months. The core credit challenges are declining enrollment, which remains below pre-pandemic levels, and state funding that has "lagged expenditure growth," constraining districts' ability to align recurring revenue with rising operations costs, Moody's analyst James Kelely said.

California saw 19 upgrades versus 9 downgrades in the California K-12 space over the past 12 months, Kelely said. In the Golden State, declining enrollment is a statewide credit challenge, but the primary drivers of expenditure growth are increasing salaries and benefit costs, along with special education costs.

In Washington, state funding continues to grow, through for most districts active budget adjustments are necessary to maintain structural balance, Kelely said. In California, state funding has lagged expenditure growth and constrained districts' ability to align recurring revenue with operating cost pressures, he said.

In Fitch's criteria, California's statutory protections for general obligation bonds allow for a potential five-notch uplift above the issuer default rating, a view that was re-evaluated following rulings from the Puerto Rico bankruptcy, Ribble said.

Roughly 60% of school districts in the U.S. have limited or minimal budgetary flexibility, the two lowest assessments under its criteria, because they typically cannot raise revenues meaningfully without voter approval, she said. Around 11% of school districts ratings are on negative outlook, compared with 6% of all local government ratings, Fitch analysts wrote.

It's not just urban schools feeling the pinch. Moody's on Tuesday downgraded the suburban San Francisco Dublin Unified School District's issuer rating to A1 from Aa3 and GO rating to Aa3 from Aa2 and revised the rating outlook to negative . The district has roughly $760 million in outstanding GOULT debt.

The change in outlook to negative reflects "our expectation that the district will be challenged to return to structural balance in fiscal 2027 given limited ability to make additional meaningful expenditure reductions after settling with bargaining units in March," Moody's said. The district agreed to a new contract with its teachers' union after a four-day strike in March.

One Washington school district, Kings County School District 412, went in the opposite direction, with its outlook revised to stable from negative on April 9, and its issuer and GO rating affirmed at A2.

"The revised outlook to stable from negative largely reflects the district's improving financial position and management's commitment to align ongoing revenue with ongoing expenditures," Moody's analysts wrote in the report.

It's not just K-12 schools seeing outlook revisions and rating downgrades. Higher education faces a demographic lag and enrollment shifts.

S&P had 10 higher ed rating downgrades in first quarter 2025 and 30 for the entire year, compared to five in first quarter 2026, according to data provided by Managing Director Jessica Wood. It had three upgrades in the higher ed sector in first quarter 2025 and 12 for the year, and three upgrades in first quarter 2026.

Fitch expects that this school year will be the last one in which colleges and universities will be unaffected by the decline in birth rates after the 2008 financial crash, Emily Wadhwani, a Fitch senior director, said.

"For every school in the nation, the 2025-26 academic year is expected to be the high point for enrollment with declines projected every year afterward," Wadhwani said.

These demographic changes have already contributed to rating actions, such as the downgrade of the private University of Portland in Oregon due to year-over-year enrollment declines.

The West Coast and Pacific Northwest have also seen a "longer tail of inflationary costs," related to union contracts, labor markets and utilities, which made it harder for institutions like Portland to readjust expenses post-pandemic, she said.

In terms of international students, coastal universities, including those in California, have performed well in maintaining the student pipeline.

But pressure is mounting for schools off the coasts, with the Midwest, Texas, and the southern coastal states' universities seeing the greatest impact.

Overall, some flagship universities have seen a "double digit drop," with an overall decline of 15% in international students at places like the universities of Nebraska, Texas, and Iowa. In the University of Texas system, one campus saw a 15% to 20% drop in enrollment. The decline in international non-domestic students is mostly felt at the graduate level.

In addition to demographic pressures, the national college going rate for four-year degrees has been flat to declining in certain places, like Indiana, despite temporary bumps following new scholarship legislation or state FAFSA mandates, Wadhwani said.