Association for Public Policy Analysis & Management

In recent years, school finance research has extensively augmented the body of empirical evidence concerning the effects of school finance reforms on underserved students. As a result, there is a substantial body of evidence documenting the impact of finance reforms on district resources and student achievement (i.e. Jackson, Johnson, & Persico, 2016; Lafortune, Rothstein, & Schanzenbach, 2016; etc.). Much of this research reveals the important role of resources on the outcomes of students in economically disadvantaged districts. This essay seeks to extend the literature by shedding light on school district debt and credit constraints and the role each serves in the funding of public education.

Despite long-term increases in per-pupil expenditures, school districts have witnessed increased pressure to maintain funding levels in the wake of the Great Recession primarily due to sharp declines in state budget allocations. Average state funding declined $850 per pupil from 2008 to 2013 and 31 states had not restored pre-recession funding levels by 2015 (Leachman, Masterson, & Figueroa, 2017). Such declines sharpened the burden on local municipalities to bridge funding gaps. Perhaps unsurprisingly, in the aftermath of the Great Recession funding gaps between well-resourced and poor districts grew, effects witnessed most evidently for districts with the highest state aid allotments (Evans, Schwab, & Wagner, 2017). Just as districts have ramped up per-pupil expenditures in recent decades they likewise have increased their debt issuance extensively. In fact, districts have issued over one trillion dollars of debt over the last two decades and corresponding debt interest payments reached approximately $20 billion ($2017) in 2010 (NCES, 2015).

Districts typically access debt markets to support long-term facilities construction or short-term day-to-day operations (Ammar, Duncombe, Jump, & Wright, 2004). Districts with precarious revenue streams or substantial existing liabilities, for example, may be constrained by high interest costs. To shed light on the independent effect of a change in access to debt markets, I will leverage an exogenous shock to district credit ratings, a 2010 change commonly referred to as a ‘recalibration’ to the method of municipal credit rating, which affected only a subset of districts. Following Adelino, Cunha, & Ferreira (2017), Moody’s Investor Service, the world’s second largest credit rating agency, ‘recalibrated’ the method by which it calculated U.S. municipal credit ratings to align its municipal and international rating methodologies (Moody’s, 2010). As a result, many school districts witnessed credit upgrades of one to three notches (on a scale of ten investment-grade ratings), a purely mechanical shift rather than a reflection of a change in district characteristics. The event enables quasi-experimental analysis methods including difference-in-differences and instrumental variable models to address:

1. How do districts generate local revenue across taxation and borrowing strategies? How do such strategies differ by district characteristics?
2. How do changes in district access to capital affect district debt issuance and, in turn, district outcomes including district resource allocation and student achievement?
3. How do different types of districts (i.e. by student characteristics, academic achievement, urbanicity, credit rating, etc.) respond differently to changes in their access to capital?