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Moody's Describes School Finance Ruling as "Credit Positive"

Moody's Investors Service described a judge's declaration of the state's school finance system as unconstitutional as a “credit positive,” saying the ruling would compel Texas lawmakers to “redesign the school finance system.”

After a trial that lasted more than three months, Travis County District Court Judge John Dietz ruled in February 2014 that …

One of the country’s top three credit rating agencies issued a report late Thursday describing a state district judge’s recent ruling of the Texas school finance system as unconstitutional as a “credit positive” for the state’s more than 1,200 school districts.

Moody's Investors Service described the legal challenge to the way the state distributes tax revenue for public education as a “credit positive” as it will compel Texas lawmakers to “essentially redesign the school finance system.”

District Court Judge John Dietz of Austin ruled last month that the state's school finance system is unconstitutional because of inadequate funding and flaws in the way it distributes money to districts as well as because it imposes a de facto state property tax, which is prohibited in the Texas Constitution. The Texas attorney general’s office is expected to appeal Dietz’s ruling within the next month.

“The ruling is credit positive for school districts because it provides a strong impetus for the state legislature to revise the system and increase district funding,” the Moody’s report states. “Possible remedies include increased funding from the state’s general budget, creating new state taxes dedicated to education or lifting the local property tax restrictions or caps.”

The report describes the combined impact of state budget cuts and limitations on districts’ ability to raise revenue through property taxes as leading to a drop in per-pupil spending for three years in a row.

A declaration of “credit positive” does not necessarily mean Moody’s analysts expect to improve the credit ratings of any Texas school districts soon. Rather, the analysis is meant to indicate how the agency’s analysts are viewing the impact of Dietz’s ruling, according to Moody’s spokesman David Jacobson.

Last month, Moody’s described leadership issues at the University of Texas System as "credit negative,” an assessment that was criticized by two UT regents.

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