Dive Brief:
- Slowing revenue, rising costs and student enrollment pressures have combined to lead Moody's Ratings to issue a negative outlook for K-12 traditional public schools in 2025.
- Districts will face challenges reducing expenses as the public puts growing demands on the sector and because staffing levels increased based on federal COVID-19 emergency aid, according to the forecast released this month.
- Moody's gave charter schools a stable outlook for 2025. While school choice is in high demand, flat funding on a per-pupil basis and high costs associated with recent capital outlays will squeeze charter schools' budgets, Moody's said.
Dive Insight:
Several factors led Moody's to lower its outlook for the traditional K-12 public school sector from stable to negative. However, the firm noted that pressures facing schools are not uniform across the country due to differing demographic trends across states and regions, disparate state funding formulas and varying degrees of competition in localities.
"We expect most districts will adjust operations in response to the stresses they are facing, but it will likely take a few years to implement changes fully," the report said.
A main factor for slow revenue growth, Moody's said, is the expiration of Elementary and Secondary School Emergency Relief allocations that helped schools recover from pandemic setbacks. American Rescue Plan allocations under ESSER — which at a total of $121.9 billion were the last and largest of the three COVID emergency aid packages approved by Congress for K-12 schools — must be spent by Jan. 28, 2025, unless districts receive a spending extension.
That, coupled with rising staffing costs, means the median operating fund balance ratio — the available fund balance as a percentage of operating revenue — is expected to drop from 26% in 2024 to 24% in 2025. According to Moody's and the U.S. Bureau of Labor Statistics, public education employment now exceeds pre-pandemic levels, and compensation growth in K-12 has outpaced the private sector.
Lower enrollment in traditional public schools is also predicted to strain K-12 budgets that rely on per-pupil funding. Declining birthrates and competition for students with charter and private schools are contributors, although increases in immigrant students have stabilized enrollment in many districts, Moody's said.
Regarding district efforts to reduce expenses, Moody's points to several challenges. Specifically, high-poverty school systems that received higher levels of ESSER funding will have a more difficult time weaning away from the federal aid.
Additionally, the population of students with disabilities who require specialized services is increasing, and traditional public schools serve a greater portion of these students than charter schools do.
Meanwhile, Moody's predicts charter schools in most localities will experience modest funding increases due to enrollment growth. But flat state funding, higher interest rates and inflation pressures will constrain capital projects.
Like traditional public K-12 schools, charter schools' compensation costs are rising faster than the private sector, and charters are adjusting to the end of ESSER. However, charter schools' operating and budget flexibilities are expected to keep their financial performance stable even if state funding fluctuates, Moody's said.
