The fiscal struggles of three public school districts in northwest Washington state have landed them under enhanced state oversight.
State Superintendent of Public Instruction Chris Reykdal placed three school districts in “
Binding conditions put a school district under enhanced state oversight, though it retains control of its finances.
Moody’s Investors Service
If a school district should remain in binding condition for two fiscal years without crafting a valid plan to reach fiscal solvency, the state can create a Financial Oversight Committee composed of two representatives from the Office of the Superintendent of Public Instruction and two representatives from the educational service district.
The largest of the three, Marysville School District 25, 35 miles north of Seattle, received a three-notch downgrade to A3 from Aa3 last week from Moody’s Investors Service, which placed it under review for further downgrades. The district provides education for grades K-12 with an estimated fiscal 2023-24 total enrollment of about 10,100 students, including pre-K.
The rating downgrade “is driven largely by the district’s stressed financial position,” said Moody’s analyst James Kelley. “The district is looking at a pretty sizeable deficit — and it’s budgeting for a negative fund balance of $17.5 million in fiscal 2024.”
The downgrade of the school district’s underlying rating affects $35.4 million in general obligation unlimited tax debt the district had outstanding as of Aug. 31, 2022.
The state superintendent placed the district under binding conditions in August because it is budgeting for a negative fund balance in fiscal 2024. A negative year-end fund balance can trigger the binding conditions status in which the state can review and recommend decisions related to its fiscal condition.
The state will have the opportunity to more closely review and potentially recommend school district decisions related to its financial condition, but if the district is unable to surmount these challenges, the state could recommend dissolution by the end of fiscal 2026, according to Moody’s report.
“In the event of dissolution, the district’s debt would remain the obligation of the district,” Moody’s said. “The district’s currently outstanding debt matures fully in December 2025. The rating also reflects the district’s solid resident income and wealth metrics and low long-term liabilities and fixed costs.”
Kelley said he can think of only one instance when the state dissolved a school district. It happened in 2007 when Vader School District was closed and its students were absorbed into nearby Castle Rock School District. But Kelley said it was a much smaller district than Marysville.
Fewer than 15 districts have been on binding conditions over the last 10 years,
The Marysville school district has taken several steps to close its budget shortfall, including freezing expenditures, minimizing overtime, reviewing and reducing external contracts and meeting with labor groups. It was able to save enough money through cuts to pay down a $28,000 capital projects loan early, according to an August press release.
It has also eliminated 100 positions equal to millions of dollars in staff reductions over the past few years, said Lisa Gonzales, the district’s chief financial officer.
“We have already cut the fat, now we are cutting into the bone,” said Jodi Runyon, the school district’s communications chief.
The school district reported general fund revenue of $192 million in its most recent audited financial statements for fiscal 2022, Kelley said.
Moody’s does consider it a credit positive that being placed in binding condition means the district can consult with OSPI.
“That can help them resolve matters related to the district’s financial position,” Kelley said. “It is ultimately up to the district” to close the budget gap, however.
Gonzales, named the district’s CFO this summer, said there are three main components to how the district ended up in binding condition.
The first occurred in February 2022 when the school district asked voters to renew its educational programs and operations tax levy. It failed, as did a subsequent vote in April 2022.
“That automatically created a $25 million hole in our budget,” Gonzales said.
Even though voters did finally approve the levy in February 2023, “it is experiencing significant near-term liquidity challenges and aligning revenue with expenditures and restoring reserves, a precondition to exit binding conditions, will be challenging,” Moody’s said in the rating report.
School districts in Washington go before voters regularly for levies, which have a two-to-four-year lifespan to fund operations and capital projects.
The second factor was that the school district has experienced a drop in enrollment, an experience shared by half of the schools in Washington after the pandemic, Gonzales said. And the third was that the school district had a number of bargaining agreements in place with school employees that resulted in a significant increase in salaries compared to before the pandemic struck, she said.
“You take those three things and put them together and you have the trifecta that created the situation we are in,” Gonzales said.
As for enrollment, Gonzales said “most school districts thought when students left during COVID-19, they would come back, but they didn’t.”
The total K-12 enrollment went from 9,857 for the 2022-23 school year, to a projected 9,750 in the district’s 2023-24 budget, according to the district’s 2023-24 preliminary budget.
According
OSPI announced Dec. 6 that enrollment in Washington’s public schools this fall has climbed by nearly 2,000 students when compared to fall of last school year. But that doesn’t reverse a three-year decline in student numbers.
Student enrollment has an impact on the amount of state funds that school districts receive to serve their students with dedicated staff, supplies, and other operating costs, according to the enrollment bulletin put out by Reykdal’s office.
To support school districts in continued service delivery and in student learning and well-being recovery during the pandemic, Congress allocated billions of dollars to schools nationwide, including $3 billion to schools in Washington, according to the bulletin.
“In Washington, the $800 million provided each year only slightly offset the $600 million that districts lost in state funds after a decline in student enrollment at the height of the pandemic,” the bulletin said.
“While our enrollments are continuing to climb, they aren’t yet where they were before the pandemic, and many of our school districts are making tough financial decisions as a result,” Reykdal said in the bulletin. “The impacts on local budgets are compounded by persistently high inflation.”
The Marysville district’s underlying A3 rating is under review for further downgrade “due to the district’s severe operational and financial challenges, most significantly including the uncertain prospects for boosting near-term liquidity. The district’s trend of declining enrollment will also remain a challenge, and one that will likely be exacerbated by the district’s financial difficulties,” according to the Moody’s report.
The district’s GOULT bonds are payable from the district’s full faith, credit, and unlimited property tax pledge. Bondholder security is enhanced by the county-provided lockbox for GOULT debt service. The Aaa-rated Washington State School Bond Guarantee Program further wraps $19 million of the Marysville district’s debt as of Jan. 1,
Given its current financial situation, Gonzales doesn’t anticipate that the Marysville district will be issuing bonds over the next two years, so the lowered ratings and any potential impact on bond pricing isn’t a top line concern.
“This is pretty unprecedented times,” Gonzales said.
“The fact is there are two other schools districts in binding conditions. We are the largest of the three,” she said.
“I feel like we are at a tipping point, just because the cost of doing business is on the rise,” she said. “And we aren’t seeing changes in the way we are funded.”
And with the upcoming short legislative session and governor’s supplemental budget Gonzalez said: “We aren’t expecting any windfalls of money that would help us.”