California local education agencies' issuance of tax and revenue anticipation notes will remain high, despite improved liquidity positions, Standard & Poor's said in a recent report.

Improved state education spending will help stabilize liquidity among schools, but it will not fully relieve cash flow pressures for most school agencies.

"Liquidity pressures likely peaked in fiscal 2013 (which ended June 30), and we anticipate TRAN volume will decline but remain elevated because state aid deferrals that remain outstanding are concentrated near the end of the fiscal year," analysts wrote in a report released Wednesday.

The majority of Standard & Poor's TRANs ratings for this debt type have been SP-1-plus, the highest short-term rating. There have been relatively infrequent SP-1 and SP-2 short-term ratings, which the agency expects to further decline in the next year.

Issuance of TRANs, which help agencies bridge cash shortfalls when outflows exceed inflows, tends to increase during state budget distress. In fiscal 2002, California began deferring state aid for local education agencies. Between fiscal 2004 and 2008, the state made about $1.3 billion of annual inter-year state aid deferrals, and in 2009, the amount of deferrals increased to $4.5 billion.

In 2010, when deferrals increased to $6.3 billion, agencies started pushing up total annual TRAN par amount to total $2.7 billion for the year. TRAN volume peaked in fiscal 2013 at $5.1 billion.

Standard & Poor's expects TRAN volume to decline in 2014 from 2013 levels, but will remain elevated above pre-2010 levels.

Despite the expected elevated issuance of TRANs, analysts expect that California's improved revenue growth will provided much needed relief to local education agencies.

"The state's budget boosts the funding guarantee for K-14 (includes community college) education programs by an additional $2.9 billion for fiscal 2013, leading to a cumulative increase of about $8 billion over the two-year period ending in fiscal 2014," analysts wrote in the report.

They added that the new state budget sets a road map to fully pay off deferrals by fiscal 2017 and to restore Proposition 98 funding, a voter-approved spending guarantee per student, to pre-recession levels by fiscal 2021.

Standard & Poor's expects cash flow borrowing among schools to decline as the state's financial position improves and it retires additional deferrals.

"The time frame for this reduction depends largely on the rate that the state's general fund revenues recover and on consensus between the governor and legislature on how to allocate additional revenues, which can be difficult to project," analysts wrote. "Current estimates from the governor indicate that the state will retire outstanding deferrals within four fiscal years, by 2017."

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