SAN FRANCISCO – Moody’s Investors Service said the credit quality of the 327 school districts in California it rates would weaken if two state ballot measures to increase taxes fail this November, with downgrades possible for the most frail.
“We expect as many as 150 of the 327 California school districts that we rate to face some degree of fiscal pressure,” Moody’s said in a report Wednesday afternoon. “We would immediately place the weakest of these on review for downgrade if the proposals are defeated.”
Moody’s said the 327 school districts it rates have $43 billion of outstanding debt.
The ratings agency did not specify which districts could be targeted, but added that the districts with the “weakest liquidity positions” would face the highest likelihood of a downgrade.
California voters are set to consider two education-funding measures – Proposition 30 and Proposition 38 - on the Nov. 6 ballot.
Proposition 30, proposed by Gov. Jerry Brown, would raise an estimated $6 billion annually by increasing sales taxes, and income taxes on the wealthy to maintain funding levels for K-12 schools.
If it fails, “trigger cuts” built into the state budget would cut school spending by $2.2 billion.
Proposition 38, proposed by attorney Molly Munger, daughter of Berkshire Hathaway Inc.’s vice chairman, Charles Munger, would generate $10 billion each year in state revenues solely by increasing income taxes for most Californians with 60% of the money going to K-12 districts and the rest used to reduce school district debt.
A poll released Wednesday by the Public Policy Institute of California found that only 49% of likely voters support Prop. 30, while only 39% favor Prop. 38.
According to state law, if both measures receive a majority vote, the one with the most votes will be enacted. The midyear “trigger” cuts will also happen if both fail, or if only Prop. 30 fails.
Despite the risks, the school districts are unlikely to default on debt due to the state constitution’s commitment to education, state government oversight, which typically includes takeovers of struggling districts, and the general obligation bond pledge of unlimited property tax securing district bonds, according to Moody’s.
