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Perspective published on September 28, 2022

Is it time to go back to school on K-12 public school credit fundamentals?


  • Declining school enrollment and more school choice may negatively impact credit fundamentals for school districts and local general obligation (GO) bonds.
  • Despite the risks, credit quality is likely to remain strong in most districts.
  • But potential growth in K-12 public school alternatives warrants monitoring given the importance of school districts to the municipal bond market.

In our 2022 Municipal Bond Market Outlook, we noted that the COVID-19 pandemic had contributed to lower K-12 public school enrollment and student achievement. Districts that relied on remote learning experienced higher enrollment declines and educational backsliding relative to peers.

Now, nearly 3/4ths the way through the 2022 calendar year, evidence is accumulating that pandemic-induced enrollment declines may prove lasting and give way to more school choice.1 A combination of factors, including remote school, migration, and remote work contributed to weaker enrollment patterns during the pandemic. Parents and policymakers now appear more interested in school choice for a variety of reasons.

A secular trend of declining enrollment and more school choice options could negatively impact school district and local general obligation (GO) credit fundamentals. Some districts could receive less state aid, face more competition, or suffer weaker tax base and economic growth. If charter schools proliferate and issue more debt, the market could see more below investment grade ratings.

Notwithstanding the potential for enrollment attrition, credit quality is likely to remain strong in most districts. School district debt is typically supported by strong legal structures, including credit enhancement, that insulates bondholders from the operating stress caused by enrollment weakness. Districts are highly rated and generally flush with cash thanks to three COVID-era stimulus bills. In most districts, there are limits to the competitive threat posed by school choice. Large urban school districts seem most at risk from sustained disenrollment, but the ratings generally incorporate these risks.

Still, recent enrollment declines and the potential for growth in K-12 public school alternatives warrant monitoring. For over two years market observers have fretted over pandemic-induced changes to mass transit systems, urban business districts, hospitals, and airports. Less serious consideration has been given to school districts. That makes little sense given their centrality to the public finance ecosystem.

The latest on K-12 public school enrollment trends

There is little question that the COVID-19 pandemic caused a decline in U.S. K-12 public school enrollment. Public school enrollment fell by 2.7 percent or 1.3 million students between Fall 2019 and Fall 2021.2 It declined in each of the fifty states in 2020 and recovered in only seven by the beginning of the 2021-22 school year (Figure 1). Early indications for 2022-23 suggest that the enrollment recovery has stagnated. Total enrollment in non-charter public schools in September 2022 was 1.27 million students lower than in Fall 2019.3

Three factors appear most responsible for COVID-related enrollment declines.

First, remote schooling is correlated with weaker enrollment patterns. Non-charter public school districts with the most remote learning days during the 2020-21 school year lost an additional 1.2 percent of students in the 2021-22 school year.4 Districts with the least remote learning in 2020-21 experienced a rebound in enrollment of 0.9 percent in the following year.5 Parents, health policy experts, and educators (across the globe) have expressed varying opinions on the wisdom of remote schooling during the pandemic. However, some parents clearly opted to remove their children from traditional, neighborhood public schools. This seems particularly true for parents of young children, such as kindergartners, for whom remote school may have made limited sense.6

Second, the pandemic accelerated pre-existing enrollment declines stemming from weak demographic trends. Eighteen (18) states experienced enrollment declines in the 2010-19 decade prior to COVID (Figure 2). Of these, 16 reported declines during the 2019-21 COVID period (Figure 2). In most of these states, slow population growth correlated with enrollment patterns from 2010-19 (Figure 3). Given that the pandemic accelerated many Americans’ moving plans, enrollment declines are at least partially explained by a “pull-forward” of enrollment patterns that would have occurred in later years. For example, enrollment weakness in New York City has been attributed to families migrating out of the city earlier than anticipated as well as low birth rates.7

Third, a small portion of enrollment declines is likely related to the advent of remote work. A handful of well-resourced families opted for home-schooling or online charter schools, while traveling the country in recreational vehicles.8 Others absconded to second homes. In Vermont, towns that host ski resorts witnessed a boom in enrollment during the pandemic.9 Most these students likely returned to their pre-pandemic schooling arrangement, eventually—but plainly not all.

The students who have not returned to traditional public schools since the onset of the pandemic fall into four broad categories.

First, some students dropped out of school, altogether. Recent stagnation in high school graduation rates in many states highlight this reality.10 So does an uptick chronic truancy, which is correlated with dropout rates.11 Many students have settled into a “new normal” in terms of their relationship with school. This mirrors the pattern with adults who have opted alternatively for new jobs, new work-from-home arrangements, or dropped out of the workforce entirely.

Second, a small proportion of families have opted to continue home-schooling their children. By some estimates, as many as 3.7 million students were home schooled in the U.S. in 2020-21, up from 2.5 million the prior year.12

Third, private school enrollment has grown, altering a pre-COVID trend. Prior to the pandemic, private schools had experienced stagnating enrollment across the country. Private high school enrollment in 2019 was 9 percent of total 9-12 enrollment, about the same level as in 1989.13 Total enrollment in Catholic schools declined by 15 percent in the 2011-21 decade, from over two million to under 1.7 million.14 The expense of private school and the growing secularization of American families contributed to these patterns.

However, private school enrollment (in particular, Catholic school enrollment) appears to have increased since the pandemic.15 This likely reflects, at least in part, school decisions to offer in-person learning during the 2020-21 school year.

Recent hiring data supports this conclusion (Figure 4). K-12 private and sectarian school hiring is recovering at a much faster pace than in public schools. This pattern differs from that witnessed after the 2001 recession, when both public and private school employers added staff throughout the downturn. It also differs from the 2007-09 recession, when public schools cut staff due to severe resource constraints.16 One might expect an entirely opposite trend. Public and private school employers face the same wage-pressure constraints, but only public-school coffers are flush with federal aid.17

Fourth, more students now attend public charter schools than before the pandemic. Charter school enrollment had been rising for at least a decade prior to the pandemic (Figure 5). To some extent, the recent increase in charter enrollment merely reflects an acceleration of this pre-pandemic trend. But enrollment jumped by 7 percent in the 2020-21 school year compared to 2019-20, which suggests that charters likely benefitted from offering learning modes distinct from those offered in the local public schools. In districts where remote school was the norm, charters with in-person learning likely benefitted. In districts where in-person learning predominated, on-line charters gained.18

More recently, there are anecdotal signs that charter school enrollment growth is slowing. For example, the School District of Palm Beach County, Florida, and Dallas Independent Schools, Texas, reported that charter enrollment appears saturated as the 2022-23 school year begins.19 In California, where roughly one-in-nine students attend a charter school, charter school enrollment fell by 1.8 percent in 2021-22 (after rising by 3.4 percent the prior year).20 Online charters are an exception. There, enrollment trends appear to remain reasonably strong.21

Tailwinds for the school choice movement could accelerate enrollment challenges

A variety of indicators suggest that disenrollment patterns spurred by the pandemic have left more parents amenable to non-traditional schooling options. This could increase enrollment stress for K-12 public schools.

As an initial matter, the pandemic is not over.22 A winter surge of COVID cases remains possible, and some parents may opt for a different learning environment for their children again this year if controversies over masking and remote-schooling return.23 A handful of U.S. school districts have begun 2022-23 with a masking policy in place.24

The demographic profile of America’s students is also changing. Notably, non-Hispanic white students comprise a shrinking share of overall public-school enrollment (Figure 6). In past periods of similar, albeit more rapid demographic change, parents have sought alternatives to their zoned public school. Extreme examples of this behavior surfaced in the aftermath of the Brown v. Board of Education decision, the Supreme Court case that abruptly desegregated America’s K-12 public schools.25 Modern racial mores and conditions differ substantially from the 1950s and 1960s, and private and public schools are both experiencing a similar demographic makeover (again, Figure 6). But it is a stubborn fact that American school districts are more segregated today than in the 1970s.26 As the country diversifies it’s not inconceivable that a sorting process plays out across public school systems, choice programs, and private school options.

Debates over curricula may also incent more school choice. Across the U.S., states and districts are variously expanding or circumscribing pedagogical boundaries as they relate to race, gender, and sexuality issues.27 Some parents may increasingly seek schools more aligned with their cultural views than what is on offer in their neighborhood. Here, again, education-history is instructive. One can see parallels in today’s curricula wars with the vehement fights between Catholic and Protestant parents in the late 1800s. We would not go too far with this analogy; most parents report satisfaction with their school curricula.28 But those debates eventually gave way to ballooning private Catholic school enrollment.29

Global demand for private tutoring is also suggestive of a change in public attitudes regarding school choice, or at least paying for bespoke educational experiences. The so-called “shadow education” market for individualized learning expanded rapidly prior to COVID-19. The pandemic accelerated it.30 The private tutoring market is expected to grow by over 9 percent between 2022-28, from $30 billion to nearly $50 billion.31

Lastly, policy is being realigned to reduce impediments to private and charter school options. Two recent Supreme Court cases make it easier for states to subsidize sectarian schools.32 The federal Tax Cuts and Jobs Act (2017) expanded the use of tax-advantaged 529 plans to include K-12 private school tuition.33 Several states seek to expand school choice options. Recent legislation in Florida expands voucher programs. Arizona has created a voucher system for all K-12 students in the state.34 If Republicans retake Congress next year, it’s possible that Congress repurposes COVID-era K-12 public education aid for school choice initiatives.35

All the above is made possible by declining public trust in the public school system. In a recent Gallup poll, only 28 percent of Americans expressed “a great deal of confidence in public schools,” near the all-time low.36

Disenrollment has negative credit implications

To the degree newfound momentum for school choice causes further disenrollment, it is a credit-negative development for municipal investors. This is true for several reasons.

First, school grant aid typically falls when enrollment drops. In every state, grant aid is predicated on enrollment or its derivative and represents a large portion of K-12 public school revenue.37 State funding ranges from 33 percent of spending in Missouri, Nebraska, and New Hampshire to as much as 89 percent in Vermont and Hawaii.38 Rating agencies consider state aid and enrollment trends in their school district rating methodologies. Moody’s Investors Service explicitly includes weights for the size and consistency of state aid as well as a district’s enrollment trends.39

Second, school choice weakens a district’s monopoly position over local K-12 education delivery. In Michigan, competition from charter schools has proliferated in recent years resulting in downgrades. Two Michigan school districts even defaulted in 2013, in part, because “rising school competition amidst population declines” reduced enrollment and revenues.40

Third, disenrollment will tend to slow local tax base growth. The quality and reputation of traditional neighborhood public schools has long been correlated with residential real estate values.41 Communities with disfavored schools are less likely to attract capital, families, and jobs, over time.

Fourth, disenrollment could lead to slower economic growth in-and-of-itself. Some portion of the 1.3 million K-12 school age children who have left the public schools are unlikely to re-enroll anywhere. Research has consistently demonstrated that additional years of schooling and skill-acquisition gained through school is associated with stronger growth (Figure 7).42

Lastly, to the degree disenrollment leads to more school choice, it would likely result in more low-rated charter school bond supply. Charters often issue non-rated or speculative-grade debt backed by volatile school-level revenues, as opposed to more stable district-level taxes. Charters generally cannot issue GO bonds, and they rely to a significant degree on state aid and donations to support credit quality, especially in their early years. In 2022, 57 percent of Standard & Poor’s 313 charter school bond ratings were below investment grade.43

Fortunately, the market is well positioned to absorb a change in enrollment patterns

Notwithstanding the risks, enrollment attrition and school choice are unlikely to mature into material credit issues for many issuers.

As an initial matter, a large portion of school district debt is structured to be insulated from the operating stress caused by enrollment declines. For example, California districts typically issue GO bonds that are designed to be paid even during bankruptcy.44 California school district debt comprises roughly 22 percent of all publicly traded school district bonds.45 Another 50 percent of school district debt comes with credit enhancement provided by a state aid intercept program, permanent fund, state guarantee, or other form of appropriation-linked support.46 These programs tend to provide substantial ratings uplift to a district’s underlying credit fundamentals.

Even in districts that lack strong security features, enrollment pressure is likely to result in only ratings downgrades from high levels. The median school district rating for Moody’s Investors Service is Aa3.47 Standard & Poor’s rates over 60 percent of school district debt in the four largest states AA- or higher (California, 73 percent; Texas, 63 percent; Florida, 83 percent, New York, 69 percent).48

Importantly, most school district balance sheets are presently very liquid. Federal aid for K-12 public school districts has buoyed credit fundamentals and is likely to stay elevated relative to historical norms for another couple of years (Figure 8).49 States are also doing well. Large state surpluses can help support school districts, if needed.

Several big city school districts seem most at risk from recent enrollment trends. Seven of the 10 largest standalone districts experienced substantial declines from 2015-21 (Figure 9). However, in our view, most of these districts already carry ratings that reflect potential credit weakness. To the degree the ratings are too high, the market and rating agencies generally appreciate the secular risks.

Too big to ignore

Investors should remain attentive to the potential for disenrollment and school choice to disrupt traditional K-12 public school service delivery, even if the risks are very likely manageable. Public schools are central to the U.S. public finance landscape and the municipal bond market. The sector is too big to take for granted and the nature of U.S. public schooling is to vacillate between more—and less—parental control.

Nationally, 26 percent of all state and local general revenue goes to funding K-12 public schools. Public schools are also the largest state-local employer, by far. Forty percent of the state-local workforce comprises public school employees.50 In 2021, there were 20 million public school employees. There were just over eight million employees for police, fire, water, sewer, and public hospital systems, combined.51

Public schools also spend a lot on capital needs. In the 12 months ending through June 2022, K-12 public schools spent $51 billion on capital projects (around 16 percent of all state-local capital expenditures). Only highways and streets consumed a larger share of state-local capital budgets.

K-12 public school systems also issue a lot of debt. There are 14,000 public school districts in the U.S.52 Of these, roughly 8,900 have publicly traded debt, representing just under $487 billion in bonds.53 These 8,900 issuers represent roughly 20 percent of market obligors and 13 percent of municipal debt outstanding.54

The central role of school districts in the state-local finance ecosystem reflects the understanding that each child has a “right” to a basic education.55 This sensibility animates public support for K-12 public school funding, generally, while honoring the intuition that parents should retain broad authority to control the education of their children. Each of the 50 state constitutions requires the state to provide an “adequate” education.56 But these obligations are balanced against the idea that parents can choose educational options not provided in their local school district.57

Even if there is a low risk that today’s enrollment trends portend a new paradigm for public schools, investors should take note.


Rev: #307832 (9-26-2022)

[1] For example, see the American Enterprise Institute’s Return2Learn tracker. Available at: The tracker employs a mix of machine learning and other technology to assess individual public school district enrollment trends on a weekly basis.

[2] National Center for Education Statistics, Digest of Education Statistics, Table 203.20 (2022 digest tables).

[3] Return2Learn Enrollment Tracker. Available at:

[4] See Return2Learn’s data. The organization tracked 7,700 districts for this analysis and produced a score to estimate the number of weeks of student time that was “remote”, “hybrid”, or fully in-person. The 2,600+ districts with the most in-person time were labeled “mostly in-person. The 2,400+ districts in the middle were “average remote & in-person”, and the 2,700+ districts that were “mostly remote” were the least in-person. Available at:

[5] Ibid.

[6] Thomas Dee, Elizabeth Huffaker, Cheryl Philips, and Eric Sagara, “The Revealed Preferences for School Reopening: Evidence from Public -School Disenrollment (2021). Available at:

[7] Reema Amin, “What is going on with NYC’s public school enrollment? We explain.” Chalkbeat. Available at:

[8] Diana Lambert, “Roadschooling families given new meaning to distance learning,” November 18, 2020:

[9] “Lola Duffort, “The pandemic is bringing students to Vermont – mostly in towns without schools,”, August 4, 2020. Available at:

[10] Matt Barnum, Kalyn Belsha, Thomas Wilburn, “Graduation rates dip across U.S. as pandemic stalls progress,” Chalkbeat, January 24, 2022 and Douglas N. Harris and Feng Chen, “How has the pandemic affected high school graduation and college entry?”, Brookings, May 10, 2022.

[11] Jacy Fortin, “More Pandemic Fallout: The Chronically Absent Student,” New York Times, April 20, 2022. For the proposition that truancy associated with dropout rates, see:

[12] National Home Education Research Institute. Available at:

[13] National Center for Education Statistics, Digest of Education Statistics, Table 201.20.

[14] National Catholic Education Association. Data available at:

[15] Neal McLuskey, “Survey: Private Schools Appear to See Rising Enrollment, This Year and Last,” Cato Institute, October 28, 2021; Kathleen Porter-Magee, Annie Smith, Matt Klausmeier, “Catholic School Enrollment Boomed During COVID. Let’s Make it More Than a One-Time Bump,” Manhattan Institute, June 23, 2022.

[16] Private school payroll growth declined by 0.1% over the first five months of the recession beginning in March 2001 and never declined in the recession beginning in December 2007. Source: Breckinridge Capital analysis of Bureau of Labor Statistics data, September 2022.

[17] The aid was delivered via the American Rescue Plan Act and two prior COVID-era stimulus packages. Most of these funds come in the form of the “Elementary and Secondary School Emergency Relief Fund” (ESSER fund). ESSER funds were established in three bills: the March 2020 CARES Act, the December 2020 Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA), and the March 2021 American Rescue Plan Act (ARPA).

[18] Jessica Poiner, “A national look at charter school enrollment trends during the pandemic,” Fordham Institute, October, 4, 2021. Available at:

[19] Breckinridge conversations with each district per formal engagement calls.

[20] John Fensterwald, “A new chapter for charter schools in California as enrollment drops for first time in 3 decades,” Visalia Times Delta, April 25, 2022. Available at:

[21] Valerie Strauss, “Virtual charter schools see enrollments rise,”, September 8, 2021. Available at:

[22] The federal Department of Health and Human Services extended for 90 days the COVID-19 public health emergency determination on July 15, 2022.

[23] Cecelia Smith-Schoenwalder, “Is a Fall COVID-19 Surge Coming to the U.S.?” U.S. News, September 2, 2022.

[24] Jessica Blake, “New school year, no maks rules for most of U.S.,”, August 4, 2022.

[25] For example, shortly afterward Brown took effect, some districts in the South established “freedom of choice” plans or closed their local public schools, entirely, rather than desegregate. See: Janice C. Griffith, Judicial Funding and Taxation Mandates: Will Missouri v. Jenkins Survive Under the New Fderalism Restraints? 61 Ohio St. L.J. 483.

[26] Richard Rothstein, “Brown v. Board at 60,” Economic Policy Institute, April 17, 2014. Available at:

[27] Anya Kamenetz, “The education culture war is raging. But for most parents, it’s background noise,”, April 29, 2022. Available at:

[28] Ibid.

[29] We would not take this argument too far as the Protestant-Catholic disputes over curricula were grounded in religiosity and likely aroused much greater passions from parents, educators, and voters. This is especially true given that public school curricula in the late 1800s was often blatantly infused with religious teaching. Nonetheless, the result of Protestant-Catholic curricula disputes was a large, formal, very successful, private school system for Catholic students. See: Kyle Duncan, Secularism’s Laws: State Blaine Amendments and Religious Persecution, 72 Fordham L. Rev. 493, December 2003.

[30] The Economist, “The pandemic will spur the worldwide growth of private tutoring,” October 7, 2021. Available at:

[31] Facts and Factors, “Global Private Tutoring Market Size, Share,” August 2022.

[32] Carson v. Makin, 142 S. Ct. 1987 (2021) and Espinoza v. Montana Department of Revenue, 140 S. Ct. 2246 (2020).

[33] Up to $10,000 per year. IRC 26 U.S. §529(c)(7).

[34] HB 2853. Summary at:

[35] Senator Tim Scott (R-SC), “School Districts are Hoarding Federal COVID Funds,” Wall Street Journal, August 2, 2022.

[36] Lydia Saad, “Confidence in Public Schools Turns more Partisan,”

[37] Michael Griffith, “State Education Funding Formulas and Grade Weighting, May 2005. See also, “A Quick Glance at School Finance: A 50 State Survey of School Finance Policies (2018). Available at:

[38] National Center for Education Statistics, Table 235.20 (2017).

[39] Moody’s Investors Service, “US k-12 Public School Districts Methodology,” January 26, 2021.

[40] Moody’s Investors Service, “Tight Liquidity and Competition Fuel Michigan School District Defaults,” June 6, 2013.

[41] Eric Hanushek and Kuzey Yilmaz, “Residential Location and Education in the United States,” Global Research Unit Working Paper #2020-017.

[42] Hanushek, and WoBmann, “Education and Economic Growth,” Stanford University and University of Munich (2010). Available at: Chart data available here:

[43] “U.S. Charter Schools Sector Fiscal 2021 Medians: Schools Get a Booster from Pandemic Relief,” Standard & Poor’s, June 14, 2022.

[44] Moody’s Investors Service, “California School Districts face a confluence of financial complications over next decade,” September 24, 2018.

[45] Breckinridge analysis of Bloomberg data, September 2022.

[46] We estimate that over 50% of school district bonds are enhanced in some way based on an analysis of Bloomberg data. For detail on enhancement programs, generally, see Chapter 72 of the Handbook of Municipal Bonds, H.B. Burger (2008). Under a state aid intercept program, a state agrees to “intercept” and redirect state aid owed to a district in advance of (or shortly after) a missed principal or interest payment. Standard & Poor’s rates 42 distinct programs.

[47] Moody’s Investors Service, k-12 public school district medians report, May 2022.

[48] Standard & Poor’s “Local Government Credit Briefs” for California, Texas, Florida, and New York School Districts.

[49] Congress supported k-12 public educational needs via the three large stimulus bills passed during the pandemic: the CARES Act (March 2020), the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA, December 2020), and the American Rescue Plan (March 2021).

[50] Prior to the creation of Medicaid, the proportion of state and local resources that went to public schools exceeded 30%, as illustrated by the data point for 1970. Medicaid and other healthcare expenditures have grown faster than school expenditures, so the proportion of resources directed to k-12 public schools has declined.

[51] Ibid.

[52] Over 90% of these 14,000 districts are “independent”. Independent districts typically have their own debt-issuance and taxing authority. Another 9% of districts are “dependent”. These districts are best understood as agencies of a county or municipal government. Dependent districts borrow through their parent entity. The 8,900 estimate here excludes any bond issuances for k-12 public school purposes where the parent entity issued the debt. (These descriptions reflect Breckinridge’s analysis of Census of Government definitions. See 2017 Census of Governments, State Descriptions: School District Governments and Public School Systems, pages 1-6. Available on the National Center for Education Statistics (NCES) website. Note that Maine operates a state-run system for students in “unorganized” rural territory and that Louisiana operates a “recovery” district for New Orleans.)

[53] Breckinridge analysis of Bloomberg data, May 2022. Some of the 8,900 names include state pooled programs for small districts. Nonetheless, we believe this figure is a very close approximate for the total number of school district borrowers.

[54] Ibid.

[55] The Supreme Court has ruled that there is no federal right to an education. San Antonio Independent School District v. Rodriguez, 411 U.S. 1, 1973.

[56] Legislatures can require student attendance and establish curricula, and at least on paper, the state cannot operate an inequitable system of public schools, based on race or inadequate local resources; Robert M. Jensen, “Advancing Education Through Education Clauses of State Constitutions,” Brigham Young University Education and Law Journal, Vol. No. 1, 1997. See also a helpful list of education adequacy, equity, and desegregation cases available here:

[57] Pierce v. Society of Sisters of the Holy Names of Jesus and Mary, 268 U.S. 510 (1925)


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