According to a new report from S&P Global Ratings, the financial health of US public schools is deteriorating. In 2025, public school systems' performance turned negative across all rating categories for the first time since the pandemic. Approximately half of districts reported operating deficits that year, a substantial jump from 33% in 2024. This trend signals mounting credit pressure that S&P analysts expect to continue.
S&P Global Ratings, through analysts Jane Ridley and Sarah Sullivant, highlighted that downgrades and negative rating actions on districts surpassed upgrades by a three-to-one ratio. The share of districts carrying a negative outlook rose to 6% in August 2026, up from 4% a year earlier. This indicates that a repricing of school district bonds, historically considered safe municipal credits, is already underway.
The core problem identified by analysts is operating leverage working in reverse. Districts are funded by student numbers, but a 5% loss of students rarely allows for a proportional 5% reduction in spending because costs are spread across instruction, facilities, and operations. Simultaneously, costs are increasing due to rising staff and insurance expenses, and growing special education obligations. These factors, combined with falling birth rates and increased competition from alternative school options, are shrinking the student pool and directly impacting revenue.
Analysts emphasize that this is a structural, rather than cyclical, issue, driven by demographic and policy trends that are not expected to reverse. Districts have been drawing on reserves, which are depleting. The report suggests that individual district credits now require the same scrutiny as other stressed issuers, as the historical assumption of uniform safety across the sector no longer holds. Future indicators to watch include the share of districts with negative outlooks, current academic year enrollment figures, and state legislative proposals for funding changes or supplemental aid.
The S&P report also points out specific states experiencing acute pressure, including Indiana, Louisiana, Minnesota, Pennsylvania, Texas, and Wisconsin, where negative rating outlooks on school districts in July 2025 constituted over 5% of rated districts. In Kansas, Missouri, Oklahoma, and Pennsylvania, downgrades in the six months prior to the report outnumbered upgrades by more than 2 to 1, compared to a national ratio of 1.2 to 1.
