SAN FRANCISCO — The recent passage of Proposition 2 by California voters is a positive for the state, but a negative for the state's school districts, according to Moody's Investors Service.
Prop. 2 will increase the size of California's rainy day fund and require the state to deposit above-average revenues into the account. It will also create a separate reserve for public schools.
"However, it also limits the amount of reserves a school district can retain in some years, a credit negative for school districts statewide," Moody's analysts Emily Raimes and Christian Ward said in a recent report.
The measure dictates that California deposit capital gains revenues greater than 8% of general fund tax revenues that are not needed to fund Proposition 98 education funding obligations into a rainy day fund.
The state's capital gains revenues exceeded that 8% benchmark in fiscal year 2013 and 2014 and the state expects them to do so again in fiscal year 2015, which ends June 30, 2015.
In addition, 1.5% of annual general fund revenues would also go into the rainy day fund each year. However, half of that amount would go toward paying down state debts for the first 15 years.
The new measure will also require an additional transfer of personal capital gains tax revenues over 8% of general fund revenues to a dedicated Public School System Stabilization Account. Before the state can make those deposits, it will need to ensure it is spending the required amount on education.
"If any deposit is made to the PSSA, the proposition stipulates a maximum amount of reserves school districts can maintain at the local level, something we view as credit negative for school districts statewide," analysts said. "The maximum reserve amount will limit school districts' overall financial flexibility and stability."
The maximum amount of local reserves for most school districts would be between 3% and 10% of the annual budget, depending on the size of the district. According to Moody's, a 6% reserve is approximately equivalent to three weeks of operational funding.
California school districts' reserve fund balances currently average about 21.5%, based on Moody's-rated districts during fiscal year 2013. Analysts said a reduction of local control, responsibility, and financial accountability will weaken the quality of school districts.
"Prop 2 impairs a district's ability to adequately protect itself against economic uncertainty and will make most school districts more reliant on state support and vulnerable to state volatility," Moody's said.
Analysts also noted that the specific language of the Proposition provides a measure of flexibility for school districts in the designation and allocation of reserves for various purposes, which dulls its impact. However, the flexibilities do not offset the agency's negative view of the relatively low, maximum reserve limit.