LOS ANGELES — Moody's Investors Service has deemed the failure of a bill that would have repealed a reserve limit for California school districts a credit negative.
The passage of Proposition 2 by California voters in November 2014, which strengthened the state's rainy-day fund, triggered the state law creating the limit on the amount of reserves a school district can accumulate, according to Moody's May 21 report.
Current estimates call for the reserve limit to begin as soon as fiscal 2017. Reserves are an important credit factor because they provide a buffer against unfavorable revenue and expenditure trends, Moody's analysts said.
The bill's failure was credit negative for all school districts, Moody's said, because the existing law inhibits financial flexibility by capping reserve limits for most districts at 6%. Depending on the size of the district, the cap could range from 3% to 10%.
"A repeal of the reserve cap would ensure more local control over financial resources, and provide greater flexibility to respond to variations in revenue and expenditures," Moody's analysts said in the report.
Reserve levels among the California school districts that Moody's rates currently average about 21.5% of revenues.
"When the law goes into effect, the far lower 6% cap will be equal to approximately three weeks of operational funding," according to the Moody's report. "The reserve cap will be imposed one year following a state deposit into the school rainy day fund."
The state's largest district, Los Angeles Unified School District will have the state's lowest reserve limit at 3%. Reserves will be capped at 6% for the other top-five largest districts: San Diego Unified School District, Long Beach Unified School District, Fresno Unified School District and Elk Grove Unified School District.
"While California follows other states in imposing caps on school district reserves, the limit comes at a time when many districts face looming budget pressures," according to Moody's.
Moody's declaration of "credit positive" or "credit negative" does not connote a rating or outlook change.
