As COVID-19 continues to spread in many regions, some Florida school districts have enforced mask mandates, defying Florida Governor Ron DeSantis’ recent order to ban masks in school. Two Florida school districts requiring face coverings—Alachua County and Broward County—are now facing financial penalties from the Florida Department of Education. The state will withhold monthly funding for school board members’ salaries until the districts reverse their mask policies.

HilltopSecurities Head of Research and Analytics Tom Kozlik addressed the clash between Florida’s state and school district’s mask requirements in his Aug. 5 commentary. At that time it was unclear if state aid would be withheld from schools that go against DeSantis’ order.

While he doesn’t believe that the withheld funds pose any immediate risk to credit quality or bond debt service, in his Aug. 23 commentary Kozlik said he is concerned about the blowback to municipals. He explained that threats to deprive school districts from promised aid may mean that state officials could duplicate the method again, creating significant complications for state and local governments and municipal investors.

“The threats happening in Florida have a potential precedent-setting nature that could increase the possibility for similar tactics to be used directly and perhaps pressure bondholder security at a larger scale,” said Kozlik.

In the same commentary, he states that the decades-long, mutually beneficial relationships between Florida’s state and local governments and school districts could be damaged. Additionally, reduced certainty about receiving consistent state funding for education may lower investor appetite for some local government and school district bond sales.

While the funds being withheld—about $13,400 per month—are only a small percentage of what school districts normally receive, Kozlik acknowledges that the long-term impacts may be far-reaching.

“There are many agreements that local governments count on to operate. If these agreements come into question or are endangered on a regular basis, it would be an unfortunate turn for the local governments and for municipal investors,” said Kozlik.

Kozlik explained in his Aug. 2 commentary that Florida school districts receive about 40 percent of funding from state government sources. He projected that “if funds are, in fact, able to be withheld, it could have significant negative credit implications.”