S&P Ratings Service PDF

Recent Changes To A California Law On School [this is copied from a PDF file; the document can be purchased from S&P]

Districts' Reserves Result In Neutral To Negative

Credit Implications

Primary Credit Analyst:

Misty L Newland, San Francisco (1) 415-371-5073; misty.newland@standardandpoors.com

Secondary Contact:

Matthew T Reining, San Francisco (1) 415-371-5044; matthew.reining@standardandpoors.com

Media Contact:

Alex Ortolani, New York 212-438-5054; alex.ortolani@standardandpoors.com

SAN FRANCISCO (Standard & Poor's) July 7, 2014--Standard Poor's Ratings

Services anticipates neutral to negative credit implications for California

school districts after recent changes to state law that could limit a

district's reserves. 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.

Very strong reserve levels contribute to a district's fiscal capacity to

absorb episodes of unanticipated fiscal strain and, thus, affect its rating

level. 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.

We understand that the new law would become operative only if voters approve

proposed revisions to the state "rainy day" fund at the November 2014

statewide general election. If approved by voters, the statute would become

operative with the fiscal 2016 budget year. However, the cap would be

triggered only in a fiscal year immediately after which the state has made a

transfer into the Public School System Stabilization Account, which would be a

newly created reserve for public school funding. We understand that transfers

to the Public School System Stabilization Account would be prohibited in any

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year for which a maintenance factor exists (the state provides less education

funding than is required under Proposition 98) or Proposition 98 has been

suspended. According to the Legislative Analyst's Office, the maintenance

factor totaled $7.9 billion at the end of fiscal 2014 and the state is

unlikely to retire it within the next five years.

The creation of a reserve cap was included in the education trailer bill as

part of the state's fiscal 2015 budget. If the reserve cap takes effect, it

would prohibit a district's adopted or revised budget from including a

combined assigned or unassigned ending fund balance in excess of two or three

times the minimum state-recommended reserve for economic uncertainties,

depending on a district's average daily attendance. For most districts, the

reserve limit would be 6%.

Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE:

MHFI), is the world's leading provider of independent credit risk research and

benchmarks. We publish more than a million credit ratings on debt issued by

sovereign, municipal, corporate and financial sector entities. With over 1,400

credit analysts in 23 countries, and more than 150 years' experience of

assessing credit risk, we offer a unique combination of global coverage and

local insight. Our research and opinions about relative credit risk provide

market participants with information and independent benchmarks that help to

support the growth of transparent, liquid debt markets worldwide.

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Recent Changes To A California Law On School Districts' Reserves Result In Neutral To Negative Credit

Implications

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