Credit Crunch in the Classroom: School District Financing Under Liquidity Constraints

• In Event: School Structure and Student Outcomes

Abstract

This paper examines how credit market access influences financial decision-making within U.S. public school districts. While district funding is typically driven by exogenous factors—such as local property values, student demographics, and state-level legal structures—districts seeking flexible capital for infrastructure and operational expenditures frequently turn to the municipal bond market. However, access to this market is mediated by credit ratings, which significantly affect borrowing costs and issuance conditions. Despite their importance, the causal implications of constrained credit access for district-level fiscal outcomes remain underexplored.

To address this gap, I assemble a novel and comprehensive dataset of all municipal bonds issued by U.S. public school districts from 1987 to the present, merged with administrative data from the National Center for Education Statistics (NCES). I use machine learning—specifically, a k-nearest neighbors classifier—to predict districts’ credit ratings and identify those clustered near key rating thresholds. This classification enables a regression discontinuity (RD) design that isolates the causal effect of marginal changes in credit access on subsequent fiscal outcomes by comparing districts on either side of these ratings cutoffs.

Empirical results indicate that districts facing diminished credit access—proxied by a downgrade in bond ratings—reduce expenditures by approximately 5% in the fiscal year following a rating update. This contraction is concentrated in instructional spending and support staff compensation, suggesting that financial constraints manifest in core educational services. Moreover, affected districts partially compensate for lost bond market liquidity by increasing reliance on short-term, non-bond debt, such as tax anticipation notes. These findings underscore the immediate budgetary trade-offs school administrators confront when external credit becomes more costly or inaccessible. I conclude by exploring mechanisms and the implications for student achievement.

Author

• Christopher Monjaras, University of Notre Dame
  Presenting Author