California school districts are facing “severe fiscal pressures,” but they can maintain their credit ratings if they act quickly to address declining state aid payments, according to a report by Moody’s Investors Service.
“California school districts are experiencing dramatic financial pressure as a result of the state’s budget difficulties,” the agency said in a special comment. “The ratings for each issuer over the next several years will reflect how they address ongoing revenue reductions.”
California cut per-pupil spending, which is the biggest contributor to school budgets, by 2.5% in fiscal 2009 and 7.6% in fiscal 2010. The state also cut so-called categorical funding by 15.4% in 2009 and 4.5% in 2010.
“School districts which are unwilling or unable to make dramatic expenditure cuts must rely on their reserves to fill structural budget gaps,” according to the report, written by a group of analysts led by Dari Barzel in San Francisco. “Districts with lean reserve or cash positions entering fiscal 2010 could find themselves with very limited flexibility.”
Moody’s rates 282 of California’s 1,052 school districts. Most are rated in a range from A3 to Aa3.
While school districts are suffering the ill effects of the state budget crisis, state law also requires county offices of education to actively monitor district finances and to intervene in district affairs during fiscal crises. California provides loans and fiscal consultants to help turn the most troubled districts around, and the superintendent of public instruction can take over insolvent districts.
General obligation bondholders have an added layer of protection from the flow of funds for local school bonds. County treasurers repay school GOs without passing the funds through school district coffers.
“The payment on these bonds as a practical matter is the responsibility of the county,” Barzel and her colleagues wrote. “The school district is minimally involved.”