LOS ANGELES — Two California school districts that received rating downgrades in recent months amid potential state takeovers are considered the exception, rather than the rule, as most of the state's school districts appear to be on the road to recovery.
Sources say that fiscally struggling districts among the state's roughly 1,000 school districts are outliers and that the majority are recovering.
At the same time, it's important to recognize that the local control funding formula proposed by Gov. Jerry Brown will not return districts to their 2007-08 funding levels until 2020-21, Jeff Vaca, deputy executive director of the California Association of School Business Officials said in an email.
"So, while things are better today, we are by no means out of the woods yet," Vaca said.
Fitch Ratings downgraded $100 million of San Ysidro School District debt to junk on Nov. 18 noting a possible state takeover.
Fitch dropped $82 million of the San Diego County district's general obligation bonds to BB-plus from BBB-plus, and $29.1 million of certificates of participation fell to BB-minus from BBB.
Standard & Poor's lowered its long-term and underlying ratings to BBB from A on Denair Unified School District's existing general obligation debt on Dec. 18 and gave the debt a negative outlook with state takeover of the school district also a possibility.
Two districts, Inglewood Unified School District and South Monterey County Joint Union High (formerly King City Joint Union High) are currently run by state appointed administrators, according to the California Department of Education.
While some districts are still struggling, most no longer have to make cuts and are recovering, said Dave Walrath, president of Murdoch, Walrath & Holmes, a lobbying firm that specializes in California public education.
"We are receiving anecdotal evidence that schools are doing better and receiving more money than they did last year," said Tina Jung, a California Department of Education spokeswoman.
Jung said they will have a clearer picture when the review of school districts produced by the state's fiscal crisis and management assistance team releases its report at the end of January.
The state contracts with FCMAT to review the finances of school districts, counties and other districts. FCMAT files reports twice a year on whether school districts are able to meet their financial obligations and classifies the schools as positive, qualified, or negative.
A positive certification indicates the school district will meet its financial obligations for the current and next two years; qualified means it may not meet its financial obligations for the same time period; and a negative certification implies it will not be able to meet its financial obligation during that time frame.
As of Sept 12, 2013, eight school districts received negative certifications and 84 received qualified certifications, according to FCMAT's review.
"The list gives the first inkling that schools are having problems, but it's not a precursor to a state takeover," Jung said.
Jung called the lists "a snapshot in time" for school superintendents that indicate that adjustments need to be made.
"The school districts on the negative list may have already made adjustments that would take them off the list in February," she said.
Denair's interim superintendent, Walt Hamlin, hopes that is the case for the school district he has been running since April and will hand over to a permanent superintendent on Feb. 3.
Hamlin said he doesn't intend to have the state take over the school district after all the work done over the past five months, but he will need cooperation from unions, who have threatened to strike.
In order to make up a $400,000 shortfall as of June 30, school salaries need to be slashed by 11%, he said.
Negotiations with the union began in July 2012 and they have done everything they can to delay the process, he said.
Hamlin came out of retirement for a second time to assume the helm at Denair after the previous superintendent was asked to leave. This is the second time he's been asked to step in and right a district on the verge of insolvency since he retired in 2010-11 from Ceres School District, also in Stanislaus County. While at Ceres, he was named California's Superintendent of the Year in 2007.
Denair has laid off 25 teachers over the last four or five months, but needs to lay off another eight teachers in order to balance the budget, Hamlin said.
"This is the worst I have ever seen," he said. "They just failed to make necessary cuts following the downturn while other school districts were making cuts."
The district's financial turmoil and less-than-stellar academic performance also have led to a drop in enrollment, which is not helping the district. The district currently has 1400 students enrolled, down 383 from 2007, he said.
The average class size is 17.9 students while comparable schools across the state average 23 students per classroom.
"There is new development in this area," Hamlin said. "The other schools in the area are growing."
The average reserves for California school districts are 15% of their general funds, according to Hamlin.
"Other districts made cuts and they are in great shape," he said.
Walrath, who represents districts throughout the state, isn't quite so optimistic.
He says that school leaders and officials are being very fiscally conservative and are wary of replacing positions cut. They fear another recession will hit just as temporary revenue sources added through Proposition 30, an initiative passed by voters in November 2012, expire between 2016 and 2018.
Proposition 30 is helping schools, Walrath said, unlike another policy change spurred by Brown, the dissolution of redevelopment.
When state legislators approved legislation introduced by the governor to dissolve the state's 400-plus redevelopment agencies, the idea was sold as one that would help provide funding to schools. The dissolution has not helped schools and could eventually result in schools receiving less money, Walrath said.
"There is savings on the state level, but it doesn't increase the amount that goes to the schools," he said.
The $1.4 billion that state officials say has been reallocated to K-12 schools and $227 million reallocated to community colleges from redevelopment agencies, merely replaces what they would have received from the state through Proposition 98, legislation that guarantees equal funding levels at districts, he said.
While schools are not currently losing money through the dissolution process, funding that schools received from the RDAs as development impact fees for school construction will disappear when redevelopment successor agencies fade out after paying off obligations incurred by the agencies before they were dissolved.
Many schools issued certificates of participation based on that funding stream, Walrath said.
The district's general funds were used as the funding stream to back the bonds, so bondholders likely won't be impacted, he said.
Thirty-six cities similarly impacted are suing the state, but no school districts have filed lawsuits, Walrath said.
Proposition 30, as advertised, is boosting school budgets.
The initiative, introduced by the governor, temporarily increases income taxes on the state's wealthiest citizens for seven years and temporarily increases the state sales tax by a quarter cent for four years.
That proposition is expected to provide $1.6 billion to schools in current fiscal year 2013-14, according to H.D. Palmer, spokesman for the state's Department of Finance.
Without Proposition 30, pre-approved trigger cuts would have meant a $5 billion reduction of funding to K-12 schools, Palmer said.
"It stopped the bleeding and then started providing funds to restore cuts made over the last five years," Walrath said.
The initiative "made a huge difference because there would have been an extreme reduction in school funding on top of what they had to endure because of the recession," Palmer said.
In more good news, Walrath said recent economic reports indicate that property tax values will rebound by 7% a year over the next six years starting in 2014.
Schools that were previously unable to issue bonds their voters had authorized -because assessed valuations were too low — could now sell bonds, he said.
"You might see more school bonds issued in the next two to four years than were issued over the past four years," he said.
