Fitch: Draft Regs on Calif. SDs a Credit Positive; Local Considerations Could Prove More Restrictive

Business Wire

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings views California's recently released draft regulations on certain state funding sources to school districts as flexible and tentatively a positive for school districts' credit quality. However, finalization of the guidelines is not expected until January 2014 and many administrative details have yet to be decided. Also, the state's new funding system, the local control funding formula (LCFF), requires school boards to adopt local control and accountability plans (LCAP) that could ultimately result in some school districts self-imposing spending requirements that are more restrictive than state regulations. As a result, Fitch will gauge the impact of the final regulations on a district by district basis.

DRAFT STATE REGULATIONS POINT TO GREATER LEGAL GRANT FLEXIBILITY

The State Board of Education (SBE) released draft regulations in late October regarding the use of concentration and supplemental grants. These grants are poised to make up a significant portion of funding for school districts with high concentrations of targeted students (those who are economically disadvantaged, English learners, and foster youths). Previously, Fitch was concerned that the regulations might impose rigid spending requirements that could largely offset any associated fiscal benefits. Instead, the draft regulations provide school districts with options and flexibility to demonstrate compliance with the requirement that the funds benefit targeted students. This approach is consistent with the intent of LCFF to transfer accountability for academic outcomes to the local level from the state.

The draft regulations allow school districts to demonstrate compliance with grant spending requirements by meeting any one of the following broad tests:

--Are the additional funds being spent on targeted students?

--Are additional or improved services being offered for targeted students?

--Are enhanced academic results being achieved for targeted students?

Fitch's discussions with school district administrators and finance experts suggest that the tests can be met in part with existing programs, so new or expanded programs might not be required in all cases. For example, many school districts that expect large grant allocations were already receiving significant categorical funding to assist targeted students. They might well continue offering those programs to demonstrate full or partial compliance with the new regulations, potentially leaving a portion of the additional grant funding for other purposes.

IMPACT OF IMPLEMENTATION UNCLEAR

While the tests are not yet finalized, it does seem clear that the state is taking a more flexible approach to grant funding than it had in the past. However, three challenges remain. First, the final regulations could change from their current form. Second, a number of implementation details have yet to be decided, and it is unclear how liberally the state and local county offices of education (COEs) will interpret the regulations and the extent to which such interpretations will vary by COE. Third, each school board will need to adopt an LCAP that is directly linked to its budget. For some districts, such spending requirements might be more stringent than those required by the final SBE regulations.

The LCAP is a goal-based document that discloses how funds will be spent to provide high quality educational outcomes. The document must be aligned with the school district's adopted budget, following input from numerous stakeholders. These LCAP preparation stakeholders include employees, parents, students, and, in some cases, separate parent advisory committees that represent English learners.

Stakeholders could successfully press for strict grant spending requirements under the LCAP. This would in turn have a direct impact on the school district's level of spending and its financial flexibility, given the direct linkage between the LCAP and the school district's budget.

CREDIT IMPACT TO BE DETERMINED BY DISTRICT

In its rating process, Fitch already considers locally imposed financial restrictions, such as lower class size maximums collectively bargained than those imposed by state law. Fitch will take a similar approach in assessing individual school districts' level of financial flexibility by considering school districts' individual LCAP requirements and related political considerations that could impair financial flexibility on an ongoing basis.

Additional information is available at 'www.fitchratings.com'.

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Contact:
Fitch Ratings
Primary Analyst
Scott Monroe, +1-415-732-5618
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Alan Gibson, +1-415-732-7577
Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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