Analysis: California School Districts to Take Down Reserves

When California lawmakers reached a deal to close a $10 billion budget gap in June, critics warned the agreement relied too heavily on $4 billion in additional tax revenue projected to materialize with a rapidly rebounding economy.

Now, with the state's recovery stalling, the new revenue is not coming in -- setting the stage for automatic budget cuts that could threaten the solvency of some state's largest school districts.

According to the state controller's office, revenue since the start of fiscal year has fallen $705 million short of projections. That signals big new cuts to school spending, said political scientist Larry Gerston of San Jose State University.

There is nothing out there that indicates that $4 billion will appear, Gerston said.

School districts are in an especially bad spot because teacher payrolls, by far their largest expense, are off limits; the 325,000-member California Teachers Association won a guarantee against teacher layoffs as part of the budget negotiations.

That deal was critical in getting a budget passed on-time -- a rarity in California -- but was denounced by school district administrators.

We were appalled, said Rick Pratt of the California School Boards Association. It was the kind of thing that got slipped into legislation, literally, at the last minute.

EATING SEED CORN

School districts will have few options in managing cuts, which would come on top of several years of belt-tightening.

They can shorten the school year, but that would require difficult negotiations with all their employees, and talks could stretch out for many months.

Non-teaching staff could be sacked, schools could be closed and after-school programs could be scrapped -- but not without resistance from employees and parents.

Another option is to eat some of your seed corn, said Kevin Shelley, superintendent of the Palo Alto Unified School District, noting that districts may have no other choice but to dig into their reserves.

That's not what credit rating agencies want to see.

If you're at the minimum, you have that much less flexibility, said Karen Ribble of Fitch Ratings.

'FISCAL EMERGENCY' FOR SCHOOLS

Prudent school districts have been preparing for lean times by fattening reserves in recent years, said Bob Blattner of education consulting firm Blattner & Associates.

The school of hard knocks has taught them to be cautious, Blattner said.

Some districts, however, may not be able to withstand the loss of money from the state. The San Diego Unified School District, for instance, faces a challenge in balancing its books and maintaining its solvency if state funding is cut, according to its superintendent.

Meanwhile, California's education department says 13 districts will not meet their financial obligations this fiscal year, while another 130 districts, including the sprawling Los Angeles Unified School District, may not meet their financial obligations this year and next.

Credit ratings of districts caught flat-footed by triggered spending cuts could suffer.

They will stay under pressure, said Moody's Investors Service's Eric Hoffmann.

The school boards association and other education groups see a gloomy scenario if cuts come about -- a fiscal emergency for public schools, according to a letter they sent last month to Brown and top lawmakers.

Accordingly (and regretfully) we urgently ask that you and the Legislature enact legislation giving districts emergency authority to take steps necessary to avoid insolvency, including the one-time ability to either lay off teachers and increase class sizes or impose mandatory furloughs if the budget trigger is pulled, the letter said.