* Press release…

Moody’s has issued a short report on the failure of the State of Illinois (rated Baa3/negative outlook) to distribute the first payment of FY 2018 general state aid to its school districts. This action is credit negative for those districts, and will weigh most heavily on those with significant dependence on state aid and lower cash reserves. The lapsed distribution follows the state’s failure to adopt a new state aid funding formula, as required by the state’s fiscal 2018 budget bill, enacted on July 6. The state’s distribution of grants owed to districts from the previous year somewhat mitigates the delay, but the effects will grow if the impasse continues.

While Illinois’ FY 2018 budget increases school district funding, it makes the distribution contingent on the state’s adoption of an “evidence-based funding” model. On August 1, Illinois Governor Bruce Rauner issued an amendatory veto of Senate Bill 1 (SB 1), which would have created the model required by the budget bill. A three-fifths majority in the legislature is required to adopt his amendments, override his veto or pass another bill to change the formula. On August 13, the Senate passed on override of the veto. The House came back into session on August 16, but has yet to act on an override.

Moody’s rates 256 school districts in Illinois. We expect 5-20 of these will have deteriorated credit within months because they may use cash reserves or borrow to cushion effects from the state aid delay. The delay will harm more districts if the impasse extends for several months. However, districts that source less than 10% of annual revenue from state aid, approximately 100 of rated school districts, would likely weather even a funding delay that lasts a year or longer with minimal effect on their reserves and credit profile. Illinois districts with lower property wealth or higher poverty tend to rely much more heavily on state aid.

Among Moody’s-rated Illinois school districts, 17 received more than 40% of revenue from state operating aid, while an additional 32 relied on aid for 30%-40% of revenue. However, many of those districts carry very high cash balances. Illinois school districts across the rating scale tend to hold higher cash reserves compared with school districts in other states.