Increases in federal funding for education over the next few years will help relieve some of the fiscal pressures on the Mexican states, a positive for credit quality, says Moody's Investors Service in a new report. Because of reforms introduced in 2013, federal funding for education is scheduled to rise 11.4% in 2015. Moody's expects the funding to grow at a more moderate 7% pace in both 2016 and 2017, still ahead of the average 5.3% annual pace over the last five years under the previous funding regime.



Mexico's new education fund for the states, Fondo de Aportaciones para la Nomina Educativa y Gasto Operativo (FONE), covers 60% of states' education spending, up from 56% under preceding fund, Fondo de Aportaciones para la Educación Básica y Normal (FAEB).



"Since education is the largest expenditure item for Mexican states, accounting for 39% of total spending on average, we expect the increased contribution from FONE to ease pressure on the states' budgets," says Moody's Analyst Roxana Munoz in the report "Increase in Federal Education Funding Eases Fiscal Pressure on Mexican States, a Credit Positive."



The increase follows reforms in late 2013 aimed at correcting disparities in teachers' pay increases among the Mexican states. Higher than average pay increases for teachers were contributing to budget deficits for some state governments.



"The beneficial effects of the increase in federal education funding, however, could be offset this year by one-off increases in state education spending linked to Mexico's 2015 Congressional and gubernatorial elections," says Moody's Munoz.



In 2013, total revenues minus total expenditures for Moody's-rated states for 2013 ranged from 5.6% to -12% of total revenues.



