Regional demographic shifts and declining birth rates in the US were already affecting K-12 enrollment by 2020, favoring some areas over others, but COVID forced a dramatic shift, kicking enrollment declines and school choice into high gear. Because there is a direct link between enrollment and school funding, these enrollment changes are significant even on a national or average basis. Clearly, however, the losses will be concentrated amongst some issuers, while others will be winners.
School districts comprise a very large segment of the US public finance market in terms of number of issuers1, and one that has long held an aura of safety—after all, what could be more plain vanilla than a GO school district bond? It is profoundly significant, then, that the longstanding sanctity and image of public education, and its monopoly hold on enrollment, has now been irrevocably broken. Credit consequences are inevitable, particularly given that substantial role of teachers pensions within the larger public sector pension debacle.
Moody’s recent revamping of rating methodologies2 to cull out public K-12 education as a unique sector appropriately reflects K-12’s blend of local control and heavy reliance on state funding and mandates, but it also recognizes the role of enrollment as a credit indicator, where rapid declines or increases are a major forward indicator of financial stress. Most directly, K-12 operating revenues and state aid are per-pupil based, but even if debt is GO-based and “must be paid” from the tax base, local public school credit depends upon the long term support of its community and its component parents and taxpayers3.
We are now well past the point of accepting that the COVID years unleashed a variety of cultural and behavioral changes in the United States that not only are still evolving but will clearly have long term effects upon municipal credit. A number of these changes were underway but were sharply accelerated by the COVID shutdowns: these include remote work and education, and demographic shifts between states and urban/suburban regions. Some of these changes will benefit those credits seeing economic and demographic expansion, while others —including
many center cities—are now beginning to suffer the revenue consequences of reduced daytime activity, in some cases exacerbated by radical changes in policing and tolerance for crime. This pattern of credit dimorphism—where public entities are increasingly sorted into winners and losers through demographics and their own governance—is arguably just beginning.
We should not be surprised to see such dimorphism emerge in the public K-12 sector, because it bore the brunt of what in clear retrospect were some of the worst public policies enacted during COVID. Public schools which suffered extended lockdowns in some regions even as restrictions on other activities eased—including, in San Francisco, private schools4. School closures added immeasurable stress to working families trying to adjust to remote lessons. Nevertheless, one might have expected K-12 enrollment to bounce back quickly. That it didn’t has now exposed some deep underlying fissures. During COVID, K-12 learning largely failed, setting back an entire generation with two years of lost learning,5 but as important the remote classes also helped fuel a growing cultural backlash as parents began to see what was actually being taught—and not taught—in the public K-12 curricula. The refusal to reopen schools quickly also exposed the power of the teachers’ unions, raising a valid question as to whom the public K-12 system really serves.
It is not inaccurate to observe that the public K-12 sector shot itself in the foot during COVID, primarily by raising parental consciousness and forcing a rethink of the long-assumed sanctity of public education. The resulting loss in enrollment in an individual school district affects its credit quality, because per pupil funding is the basis by which K-12 operating revenues are generated. Even if the K-12 district’s debt is general obligation, and “must be” paid from the tax base, the once-unquestionable stature and reputation of public K-12 education has fallen badly.
The emerging credit dimorphism in the public K-12 sector can be explained by four elements.
First, the sector was marked by already weakening demographics in the US. The higher education sector has already been bracing for an overall decline in graduating high school seniors, but aside from nationally declining fertility rates, losses in K-12 enrollment were already being projected through 2031 for states and regions that were aging, or already losing population through outmigration. These include New England, the Mid Atlantic, and California and the Pacific Northwest. Only 13 states are projected to see higher enrollment between fall 2021 and 2031.6
Atop this already weak base trend, the COVID shutdowns in 2020, the broad failure of remote classes for younger children, and the burden remote classes upon working families came as a hammer blow: the direct enrollment drop of 3% by itself wiped out an entire decade of enrollment growth. This was a loss of 1.4 million students from 51.8 million pre-shutdown, most of which was among younger students. The broad K- 12 reopening in 2021 staunched the hemorrhage, enrollment remained flat: the expected bounce-back didn’t happen. This was because public K-12 students were picked up by homeschooling, and to a lesser extent by private schools:
A third element, which helps explain the missing bounce-back, is that remote learning suddenly exposed the extent to which public school curricula and administrations had become politicized. For the first time, parents were able to see that K-12 administrators and teachers had already waded deep into the cultural war over sexual identification8, equity, and other woke issues at the expense of basic learning. This appears to not have abated.
introducing variable “equitable grading” systems14, or eliminating honors or advanced classes 15.
One of the nation’s largest K-12 districts, Los Angeles Unified, is pursuing an apparently aggressive program of cultural immersion in gay and trans identity for very young students, which is notable because the district is clearly failing its primary function:
The politicization of public K-12 has taken other forms, in particular the role of the teachers’ unions in delaying the reopening of public schools17 and lobbying to close down charter or private alternatives as a quid pro quo to reopen18, even as union leaders have been exposed as denigrating school choice but not for their own children.19
A final element is the simple loss of children from the system, which perhaps is the clearest evidence of the general loss of institutional trust following COVID. An Urban Institute analysis of the 21 states and DC that track trends, some 230,000 students (about a third of the lost enrollment in this group) can’t be explained by population shifts or increased private or homeschooling enrollment 20. Chronic absenteeism—what we used to call “truancy”--now seems to be on the upswing.
The Minneapolis detail gets to the nub of the credit issue, of course: while enrollment losses may seem small in aggregate, e.g. nationally—though 3% is still meaningful—the losses are concentrated in the loser districts that have been hammered by demographic and school preference losses, and unexplained absences. To wit, New York City is facing an 11% enrollment loss.22
Investors ignore the culture wars at their peril.