|[September 23, 2013]
Fitch: California Schools Still Face Financial Risks Despite Improved Funding Trends
SAN FRANCISCO --(Business Wire)--
California school districts' credit quality is expected to stabilize
over the short term as solid funding gains have eased immediate
budgetary and liquidity pressures caused by years of declining revenues.
However, there are significant pent-up cost pressures that could
ultimately neutralize or overwhelm future funding improvements,
potentially exerting downward rating pressure over the longer term,
according to a new Fitch Ratings report.
'Although the education funding environment has improved quite a bit
from a year ago, it's unknown whether future funding growth will keep
pace with cost increases. We are especially focused on CalSTRS [the
California State Teachers' Retirement System], whose weak and
deteriorating funded status poses what we view as the greatest long-term
budgetary risk to districts,' said Scott Monroe, Director, Fitch U.S.
State education formula funding has grown since hitting its recessionary
bottom in fiscal 2012, owing to state revenue growth and the passage of
voted tax rate increases which prevented a major mid-year trigger
funding cut. However, one-time expenditures have absorbed much of the
funding growth and the sales and personal income tax rate hikes will
sunset in fiscal years 2017 and 2019, respectively.
CalSTRS' annual contributions have been funded well below the
actuarially required contribution rate for some time, worsening the
pension system's already weak funded ratio. Some solutions proposed by
CalSTRS could result in substantially increased costs to school
districts, if implemented.
Fitch views the new local control funding formula as mixed for credit
quality, with positive to negative effects varying by individual school
district. The formula changes the distribution but not the size of state
funding, resulting in a zero sum gme with some school districts
benefitting over time to the detriment of others. Future state guidance
will determine the flexibility of significant new revenue streams aimed
at targeted student populations.
The risks to school districts are modestly mitigated by improved school
district liquidity and financial flexibility resulting from significant
pay-downs of state funding deferrals accumulated from prior years, and
the permanent elimination of most categorical programs.
The state's fiscal monitoring procedures have limited school district
financial distress and will continue to provide useful financial
management oversight and fiscal forecasting tools.
For more information, a special report titled 'California School
Districts Still Financially Vulnerable' is available on the Fitch
Ratings web site at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research: California School Districts
Still Financially Vulnerable (Current and Future Pressures Might
Outweigh Positive Funding Trends)
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