The Annenberg Institute at Brown University offers this national working paper series to provide open access to high-quality papers from multiple disciplines and from multiple universities and research organizations on a wide variety of topics related to education. EdWorkingPapers focuses particularly on research with strong implications for education policy. EdWorkingPapers circulates papers prior to publication for comment and discussion; these papers have not gone through a peer review processes. Contributors can update papers to provide readers with the most up-to-date findings.
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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, 24 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. I rely on cross- and within-district variations to estimate the effect of receiving state credit enhancement on district bond interest rate, per-pupil capital spending, and student performance. State enhancement reduces district bond interest rates by 6% and increases per-student capital spending by 6% to 7%. It also reduces the disparity in 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.