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California Gov. Jerry Brown holds up a sign in support of Proposition 30 while visiting an elementary school Tuesday, Oct. 23, 2012, in San Diego. The tax plan would boost the state sales tax by a quarter cent for four years and raise income taxes for seven years on those who make more than $250,000 annually. (AP Photo/Lenny Ignelzi)

With five straight years of budget cuts and deferred payments from the state, California school districts have increasingly had to turn to borrowing. Now, if neither state proposition that would shore up education funding passes Nov. 6, the cost of borrowing for many districts is likely to go up. Some may be forced to seek a state bailout, or possibly face bankruptcy.

That bleak scenario comes not from districts themselves nor the backers of Proposition 30 or Proposition 38, the tax measures to fund schools, but from the bottom-line analysis of Moody's Investors Services, which rates nearly one-third of the state's 1,000-plus school districts and more than half the 122 community college districts.

In a report issued last week, Moody's said that if the two propositions fail it would immediately begin reviewing the 150 districts it rates most financially precarious, and possibly downgrade their credit ratings. Both tax measures trail in opinion polling. The ratings service declined to specify which school districts it thought most at risk.

Moody's already reduced San Jose's credit rating in March, and is considering downgrading 30 other California cities' ratings, prompted by the bankruptcy of some cities and by the limits on cities' ability to raise taxes and control pension costs.

Downgrading school district ratings would increase costs to taxpayers.


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"If a school issues debt in future, under a lower rating it will probably mean a higher interest rate on those payments," said David Jacobson of Moody's. Districts issue long-term debt like bonds for construction and technology, and short-term notes to bridge the gap between expenditures and revenue.

Districts with healthy reserves would be insulated from immediate cuts, Moody's said. However, it noted, even those districts would have to cut expenses in 2013-14 if both measures fail.

Few of the 56 school districts in Santa Clara and San Mateo counties are likely to be at risk of immediate downgrading, because both county offices of education that oversee district budgets took a conservative approach to the 2012-13 budgets approved in June. "We told them you need to build into your budgets how you would manage if Proposition 30 doesn't pass," said Anne Campbell, San Mateo County superintendent of schools.

But even those not perched on a financial precipice are worried.

The Berryessa Union School District in San Jose in the spring reduced costs for technology and out-of-district special education and dipped into previously restricted funds in order to balance its future budgets, Assistant Superintendent Pamela Becker said. Ironically, even while the state cuts and delays funding, it requires districts to project three years of balanced budgets.

Knowing the whole game could change with the election, the Berryessa school board has scheduled a budget special meeting for Nov. 7, Becker said. The day after the election, "We're going to revisit the whole thing."

The Moody's report relates budgetary gloom familiar to schools: The state's per-pupil funding has declined by 7.9 percent in four years. While federal stimulus funds cushioned the reductions from 2009 to 2011, Uncle Sam's bailout has ended.

What's more, the state has transferred its cash-flow crisis onto school districts, by delaying payment on nearly one-quarter of the funds it owes schools. Of those deferrals, two-thirds are put off beyond the end of the fiscal year.

Dropping one level or more in Moody's rating in effect makes it more expensive for school district to borrow money. Some take out short-term loans from their county treasurer, others must go to the open market in order to pay their bills.

Schools, which spend nearly all revenue on salaries and benefits, must bargain with their unions to reduce staff salaries, benefits or impose furlough days.

"Many school districts' balance sheets have been weakened enough by years of funding cuts and deferrals that additional funding cuts will put them closer to needing a state loan or court protection," the report reads. But it noted that, given California's financial straits, getting a state loan is no sure thing.

The Franklin-McKinley School District in San Jose is rated in the middle to lower-middle ranks of both Moody's and Standard and Poor's, Deputy Superintendent Tim McClary said. "We have some fiscal stresses but are able to meet our obligations."

But if Proposition 30 doesn't pass, school budgets statewide will be cut mid-school year by $2.2 billion, which translates to $4 million for Franklin-McKinley. That's about $440 for every child. In that case, even with its balanced budget, the district would have to ask its unions to negotiate furlough days.

"If the full estimate of $440 does hit us this year," McClary said, "We are in a crisis situation."

Contact Sharon Noguchi at 408-271-3775. Follow her at Twitter.com/NoguchiOnK12.