SAN FRANCISCO - A bill to cap California school districts' budget reserves would likely have neutral to negative implications for such school districts, according to Standard & Poor's.
The proposal, which was included in the education trailer bill as part of the state's fiscal 2015 budget, was signed by Gov. Jerry Brown in June and will be put before voters on the November ballot.
If approved, it would limit the amount of reserves to two or three times the state's minimum reserve requirement for economic uncertainty. For most districts, the reserve limit would be 6% of expenditures.
"In our view, statutory limitations on reserves may alter the financial management landscape for California school districts that have a consistent track record of maintaining what we view as very strong reserves," Standard & Poor's analyst Misty Newland said in a report released July 7.
The new law would only go into effect if a proposed constitutional amendment to the state's rainy day reserve—which includes a school funding reserve—gets approved in the statewide vote.
If approved, it would be operative with the fiscal 2016 budget year, but the cap would be triggered only in a fiscal year immediately after which the state has made a transfer into its own state level school reserve.
According to Standard & Poor's, the transfers to the state level account would be prohibited in any year for which the state provides less education funding than is required under Proposition 98, or Proposition 98 has been suspended.
"Very strong reserve levels contribute to a district's fiscal capacity to absorb episodes of unanticipated fiscal strain and, thus, affect its rating level," Newland said. "If the law ultimately compels a district with very strong reserves to spend down a significant portion of its available fund balances, it could impact our view of a district's credit quality although we would evaluate management's response."
Fitch Ratings also said in a
