Newswise — More than half of all public school districts in the United States are in need of capital improvements. Those projects are usually funded by issuing bonds on the municipal bond market, which can be challenging for under-resourced school districts saddled with low credit ratings. It is a story that plays out all too often: poorer districts pay higher interest rates on debt issued for badly needed improvements, leaving students in low-income communities at a disadvantage compared to their more affluent peers.
Lang (Kate) Yang, an assistant professor at the GW Trachtenberg School of Public Policy and Public Administration, has identified a potential solution to school districts’ capital financing woes. In her most recent working paper, Dr. Yang encourages state governments to serve as a financial backstop for school districts through credit enhancement programs. 24 states already offer these programs, which allow school districts to benchmark their credit ratings to the state’s rating, making district bonds more attractive to investors. These programs do not require any upfront spending by the states, and in recent history, districts have almost never relied on state resources to repay debt.
Dr. Yang found that state credit-enhanced district bonds carry lower interest rates, leading districts to increase capital spending by 6 to 7%. State credit enhancement programs are especially beneficial for school districts in low-income communities, which saw bigger interest rate reductions and increased capital spending at a higher rate than wealthier credit-enhanced districts.
George Washington University
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