If California voters reject the two tax initiatives for school funding on the November ballet, Propositions 30 and 38, Moody's Investors Service would place school districts with weak liquidity on review for possible rating downgrade soon after the election.

In the report "California School Districts Face Mounting Credit Pressure If Tax Initiative Fails in November Election," Moody's says school districts with weak liquidity are not well positioned to handle the mandated trigger cuts in state funding should Proposition 30 be defeated and Proposition 38 also not pass.

Moody's expects as many as 150 of the 327 California school districts it rates to face some degree of fiscal pressure if both propositions are defeated. The weakest of these are likely candidates that Moody's would place on review for downgrade following the election. These districts feature very low or negative general fund reserves or net cash balances. Less vulnerable districts would be placed on review over the ensuing months.

Moody's says the credit quality of all California school districts benefit from the fiscal oversight provided by county offices of education and the fundamental strengths of the California local government general obligation (GO) bond pledge and payment procedures. Districts with liquidity and reserves that are not significantly impacted by the failure of tax measures would be modestly weaker but not face rating downgrades because of the propositions' failure.

"When resolving the reviews for downgrade, we would consider each district's unique credit fundamentals," said Eric Hoffmann, Senior Vice President at Moody's. Moody's would also consider the credit impact of mandated cuts in funding on 61 of the state's community colleges, the University of California (Aa1 senior most rating, stable outlook ), and the California State University (Aa2 senior most rating, stable outlook),all of which it rates.

Proposition 30 would preserve school districts' current funding levels while Proposition 38 would add additional funding to K-12 school districts. Under state law, if both measures receive a majority vote, the one with the most votes will be enacted. The failure of Proposition 30 would trigger midyear state funding cuts but if Proposition 38 passes instead, additional revenues would offset those cuts.

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