Gov. Jerry Brown’s proposal would eliminate the state’s CalSTRS underfunded liability in approximately 30 years.

LOS ANGELES - Gov. Jerry Brown's proposal to solve underfunding of the California State Teachers' Retirement System could pressure weaker school districts, according to a May 19 report from Fitch Ratings.

In his May Revision of the proposed 2014-15 budget, Brown is proposing a plan for the state, school districts, and teachers to together increase contributions by $450 million during the first year, which would grow to more than $5 billion annually in 2020-21.

The plan would eliminate the state's unfunded liability to CalSTRS in approximately 30 years.

Fitch said such reforms could have long-term positive effects, but in the near term, the plan would fall mostly on school districts and add to their budget pressures.

"There is no overall rating impact as Fitch has incorporated the weak pension system in district ratings for some time," analysts said in the report. "Over the long term, implementation of these reforms could be positive if pension funding levels improve as proposed."

Short-term budget pressure would be limited, because the increased costs would be phased in slowly and many districts and the state are better positioned to help address CalSTRS' underfunding today than in recent years, Fitch said.

The improved state economy and voters' 2012 approval of temporary tax increases via Proposition 30 have contributed to a better funding environment.

However, the proposal does not include any offsetting revenue increase for districts and Prop. 30 revenues will expire in fiscal 2018, Fitch noted.

"We believe some districts, facing continued budget pressures as they recover from years of cost cutting, could face credit pressure if new spending mandates exceed revenue growth, or crowd out other expenditures," analysts said. "If the expiration of the temporary taxes and full implementation of increased CalSTRS costs were combined with a weakened economic environment, many districts would likely have a difficult time matching revenues to funding requirements."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.