Texas school funding boost welcomed, but seen as inadequate

Texas Gov. Greg Abbott this month hailed an $8.5 billion K-12 public school funding boost passed by the legislature, saying it will improve the state’s education standing, while others contend it fails to make up for six years of mostly flat financial support. 

“House Bill 2 ensures that our schools are funded better than ever,” the Republican governor said ahead of signing the measure into law on June 4. “The foundation is now in place for Texas education to begin the upward climb in the ranks toward the pathway of eventually being ranked number one for education in the United States of America.”   

The new law directs much of the additional funding over the next two fiscal years to specific uses, such as $4 billion earmarked for teacher and staff raises. Districts will get a $55 per student increase in the state basic allotment, a gain of less than 1%. This primary source of state funding, which is based on average daily attendance, has remained at $6,160 per student since 2019. In that time, the buying power of a dollar has declined 20%, according to the U.S. Bureau of Labor Statistics.

Factoring in the surge in inflation over the past six years, the allotment should have been raised by $1,300 per pupil, according to Kevin Brown, executive director of the Texas Association of School Administrators.

While the “significant” funding increase in HB 2 was supported by his organization, districts’ discretion on how much of the money is spent is limited, he said, noting the bill’s big allocation for boosting staff pay. 

“That is great, but at the same time, (superintendents are) going to be cutting classroom teachers and programming and increasing class size and things like that to try to balance the budget,” he said.

Bond rating agencies have cited stagnant funding as a contributor to budgetary strains that have led to some underlying rating downgrades or negative outlooks for Texas districts in recent years. Public school general obligation bonds carry triple-A ratings through the Texas Permanent School Fund’s bond guarantee program.

The allotment increase is “very modest and well below inflation,” according to a Moody’s Ratings report on Friday, which noted districts will be entitled to an additional $106 per student to cover expenses such as insurance, transportation, utilities, and pension contributions. 

“While the increased funding is positive, most of it will only cover budget mandates, potentially resulting in budget deficits for some schools because it limits management’s ability to address the specific needs of their individual districts,” Heather O’Malley, a Moody’s analyst, told The Bond Buyer.

The rating agency also pointed to a longer-term credit risk in the form of competition due to the state’s adoption of a private-school voucher program. 

Abbott, who made “education savings accounts” his top priority for the 2025 session, on May 3 signed Senate Bill 2, which allocates up to $1 billion in state funding for a school choice program during the fiscal 2026-27 biennium, which begins Sept. 1. 

“As students have access to additional educational alternatives, public schools are likely to face enrollment declines unless their competitive profile improves,” Moody’s said in the report, adding state-funded school property tax relief, which was expanded this session, poses another risk because it “exposes districts to state budget cuts that may occur because of future economic downturns.”

HB 2’s funding boost will help districts in general, according to Lauren Levy, a S&P Global Ratings analyst. 

“However, given the restrictions and dedication requirements of the funding, it will not be a panacea for struggling districts,” she said in an email. “It is also not clear whether funding increases will fully offset the inflationary pressures districts have been experiencing since 2019.”

Texas school districts, which have been prolific debt issuers in recent years, dodged debt restrictions called for in bills that failed to pass during the legislative session that ended June 2.

In the May 3 election, voters rejected only $1.35 billion of the $12.95 billion of bond authorization sought by schools, according to data from the state’s Bond Review Board. Outstanding school debt totaled $130.2 billion as of Aug. 31, 2024.

For districts recently hit with negative rating actions, HB 2 provides some, but not all the financial relief they need. 

Hays Consolidated Independent School District’s budget deficits and declining reserves led to a one-notch downgrade to an underlying AA-minus with a negative outlook from Fitch Ratings in May. Moody’s in March revised its outlook on the district’s underlying Aa2 rating to negative from stable, saying the district’s inability “to return to balanced operations, especially if combined with a material increase in leverage, will likely lead to a downgrade.” 

The district’s ending fund balance has fallen from $71.75 million in fiscal 2021 to a projected $24.18 million in fiscal 2025.

Tim Savoy, Hays’ chief communication officer, said the state funding boost will help, although it doesn’t make up for inflation-driven operational costs. The district, southwest of Austin, will also get more funding due to an additional 1,000 students expected in the next school year, he added.  

The upcoming budget, which is projected to total $237 million, will be balanced with the additional revenue and the elimination of some vacant positions, according to Savoy.

Hays won voter approval in May for $962.5 million of bonds mostly to build and expand schools to accommodate enrollment growth that is projected to top 36,000 by the 2030-31 school year from 24,144 in the just-ended school year.  

The district is eying a bond sale of as much as $480 million this summer, according to Savoy.

Ahead of Denton ISD’s $171 million bond sale last week, S&P revised the outlook on its AA underlying rating to negative from stable, saying the action “reflects a one-in-three chance that we will lower the rating should the district’s deficit-mitigation efforts not slow or halt its declining fund balance, hindering the district’s ability to rebuild towards its minimum fund balance policy.”

The district, north of Fort Worth said in a statement that HB 2 will provide some additional funds, “but it will not be enough to completely address this lack of adequate appropriations by the Texas Legislature for the previous six years in spite of the reduction of over 150 non-classroom positions.”  

The Republican-controlled Texas Legislature, which meets every other year, appropriated additional funding for schools in 2023, but it was tied to the creation of a school voucher program that passed the Senate and was blocked by the House during the regular session and in special sessions called by the governor, who subsequently campaigned for pro-voucher House candidates in the November 2024 election.