Fiscal 2013 state funding trigger cuts would amplify existing fiscal challenges and could result in a heightened level of downgrades over the next one to two years as districts adjust to potentially lower baseline funding levels, according to a new Fitch Ratings report.

Fitch believes that downgrades related to trigger cuts would not be immediate and wide-spread for a number of reasons, including recognition that districts' mitigating actions will vary and will take time to formulate and enact.

“While many districts are well-positioned to weather trigger cuts in 2013, the longer-term financial implications are troubling. Years of expenditure cuts have reduced districts' financial flexibility, exacerbating the situation,” said Scott Monroe, Director, in Fitch's Public Finance group. “It is possible that school board members and labor leaders would, in some circumstances, refuse to allow further reductions, even where further legal flexibility remains.”

With rising benefit costs and pent up wage pressures, Fitch believes the ability to achieve long term labor savings will be key to maintaining fiscal stability.

Fitch has taken into rating consideration the weakness and unpredictability of state funding for many years, and the fiscal 2013 trigger cut risk generally fits within that framework.

As a result, many Fitch-rated California school districts have faced downgrades in recent years - 18% since January 2010 alone - and 19% of districts are on Rating Outlook Negative. The AA-minus average rating for California school district unlimited tax general obligation (ULTGO) bonds is one notch below the AA average for ULTGOs in the tax-backed sector.

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