A school district recently received the following: S&P specifically pointed to the state’s actions in setting the reserve cap trigger as a potential credit risk in two areas of the report. This gives a real-life example of how the reserve caps are seen as a negative with the rating agencies and how that can result in higher borrowing costs.
In addition, we note that changes to state law may alter the financial management landscape for California school districts … that have a consistent track record of maintaining fund balances in line with levels we view as very strong and strong. The district’s audited reserve level, which we consider very strong, contributes to our view of its fiscal capacity to absorb episodes of unanticipated fiscal strain and, thus, its rating level. Under the new law, in years following the state’s contribution to its rainy day school reserve, the maximum amount of reserves the district can retain is twice its minimum reserve requirement, or 6% of budgeted general fund expenditures. However, contributions by the state to the rainy day school reserve would only occur in some years when state capital gain revenues are very strong. In addition, transfers to the rainy day school reserve would be prohibited in any year that the state provides less education funding than is required under Proposition 98 or when Proposition 98 has been suspended. If the law ultimately compels the district to spend down a significant portion of its combined assigned and unassigned general fund balance, it could affect our view of the district’s credit quality although we would evaluate management’s response.
Outlook The stable outlook reflects our expectation that the district will continue to maintain its available fund balance at a level that we consider strong. Although we do not expect to change the rating during our two-year outlook horizon, should the district initiate multiple years of aggressive general fund deficit spending and reduce available fund balances, or if the district’s debt profile were to dramatically deteriorate beyond our expectations, we could lower the rating. We do not expect to raise the rating during the outlook horizon due to the district’s current debt profile although we could do so if the district were to further tap its local economy and generate additional revenue flexibility.
If you have any questions regarding this information please contact Dave Walrath (firstname.lastname@example.org or 916-448-8577).
~ C.A.S.H. Staff