California’s 2014 budget is a credit positive for the state’s school districts because it increases the amount of state aid to schools and reduces funding deferrals, Moody’s Investors Services said in a recent report.
In the first budget in five years that didn’t cut aid to schools or warn that funding might be cut during the year, school funding for fiscal 2014 was increased by $1.6 billion or 2.3% from the 2013 budget. This year’s budget, signed by Gov. Jerry Brown on June 27, also projects $20 billion of additional funding increases by 2017.
“The liquidity of all school districts will improve as the budget reduces payment deferrals and thereby improves the timeliness of aid payments,” Moody’s analyst Julian Metcalf wrote in the report, released Friday.
The state expects to eliminate deferrals to K-12 districts by the end of fiscal 2017, down from a high of $9.5 billion in fiscal 2011.
Districts in poorer communities stand to gain the most because the amount of aid allocated to them relative to other districts will increase as a result of changes to the funding formula.
A new Local Control Funding Formula will determine individual district funding allocations. The formula favors districts in poorer communities, focusing on student populations that qualify for free and reduced lunches, English language learners, and students in foster care.
Moody’s said the added funding could enhance these districts’ credit profiles, but effective management and budgeting of the funding enhancements will also be factors in their credit profiles.
“The credit positive budget measures are not a panacea because some school districts will continue to be challenged by expenditure pressures and growing pension costs,” Metcalf said. “Many districts will quickly spend the additional state aid to back-fill pent up sending needs.”
In addition, labor unions will likely pressure districts to share some of the added funding with employees, the report said.
Moody’s also noted that schools will continue to face a growing pension burden, which will not likely be alleviated by the added funding.
