TAHOMA, Calif. - California Gov. Jerry Brown's proposed budget would improve the credit quality of the state's school districts, according to a report Thursday by Moody's Investors Service.

The ratings agency said the spending plan, if adopted by the Legislature, would include the first per-student increase in education funding in five years and reduce deferred cash payments to schools.

"While the proposed budget is favorable news for the credit quality of California school districts, the budgetary increase only begins to restore some of the budget reductions and cash deferrals of past years," Moody's said.

The firm said the continual increases in district funding, along with effective spending management for state schools, are needed for average credit quality to significantly improve.

Even though the Legislature is months away from passing a budget, Moody's said it expects higher school funding in some form given the improving California economy and the tax increases approved by voters in November.

Brown pitched the sales tax increases and high income taxes on the wealthy, approved as Proposition 30, as a way to prevent cuts to education funding.

The governor's $98 billion spending plan would increase Proposition 98 spending, a voter-approved spending guarantee per student, by $2.7 billion, or more than 5%, to $56 billion in fiscal 2014 from a year earlier, the report said.

Moody's said in a report earlier this month that California's finances are in the strongest position of any time in the last five years.

The state's nonpartisan Legislative Analyst's Office forecasts Prop. 98 funding will increase by between 3% and 5% each year for the next several years.

The proposed budget would also reduce cash deferrals by nearly $2.2 billion, or 40%, next fiscal year compared to this year, according to Moody's.

The firm said that at the apex of the recession 45% state payments to school districts were delayed.

However, challenges still remain, the report said, noting that the state still owes schools for past deferrals and that Prop. 98 funding is still 10% below fiscal 2008 levels.

Those delays typically translate into school districts issuing tax and revenue anticipation notes or internal borrowing.

"Over the long-term the state's highly cyclical revenues could create substantial volatility in the state's funding of school districts," Moody's said.

The company also said that school districts will face significant pressure to share any revenue growth with unions, which could create spending pressure in the long run.

And since Brown's budget doesn't include a school construction bond issue, school district may incur addition debt burdens to fund improvements, Moody's said.

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