School District Borrowing and Capital Spending: The Effectiveness of State Credit Enhancement

Abstract

Abstract School districts in the United States often borrow on the municipal bond market to pay for capital projects. Districts serving economically disadvantaged communities tend to receive lower credit ratings and pay higher interest rates. To remedy this problem, twenty-four states have established credit enhancement programs that promise to repay district debt when a district cannot do so, thereby enhancing the district's credit rating. With a generalized difference-in-differences approach, I rely on cross- and within-district variations to estimate the effect of state enhancement on district bond interest rate, per-pupil capital spending, and student performance. State enhancement reduces district bond interest rates by 6 percent and increases per-student capital spending by 2 percent to 7 percent. It also reduces the disparity in the interest rate and capital spending across districts serving lower- and higher-income families, with no discernible effect on test scores. I find no evidence that the amount of enhanced school debt is associated with significant changes in interest rates paid by state governments. Districts in states without such programs could have achieved cost savings in the range of $383 million to $1 billion from 2009 to 2019 had the states adopted similar programs.