California Tax Defeat May Prompt Downgrades, Moody’s Says

As many as 150 of the almost 1,000 school districts in California may face credit downgrades if voters reject two tax measures on the Nov. 6 ballot, Moody’s Investors Service said in a report yesterday.

School districts would lose as much as 7 percent of their funding if voters turn down a sales- and income-tax increase backed by Governor Jerry Brown and a competing boost in income levies proposed by Los Angeles attorney Molly Munger, Moody’s said. Revenue from both is earmarked for public education.

“We would immediately place the weakest of these on review for downgrade if the proposals are defeated,” said the report by Julian Metcalf, a Moody’s analyst in San Francisco. “The weakest would principally be those with very low or negative general fund reserves or net cash balances.”

Brown, a 74-year-old Democrat, is campaigning for Proposition 30, which would temporarily boost the state sales tax to 7.5 percent from 7.25 percent and raise the levy on income starting at $250,000. A rejection by voters would trigger $5.5 billion in education cuts, enough for three weeks of classes.

Munger, the daughter Charles Munger, the vice chairman of Berkshire Hathaway Inc. (BRK/A), is pressing for Proposition 38, which would boost taxes for 12 years on income of more than $7,316, from a 0.4 percentage point increase for the lowest earners to 2.2 percent for those making more than $2.5 million a year. It would raise $10 billion annually.

$43 Billion Debt

Moody’s rates 327 California school districts for general debt and seven more for leases or certificates of participation. The districts have about $43 billion in total debt, Moody’s said. The largest share, 118, are rated Aa2, Moody’s third- highest grade. The most-populous state had 963 school districts in 2010, according to a report by the California School Boards Association.

Twelve California school districts were at risk of bankruptcy in May, state Superintendent of Public Instruction Tom Torlakson said in a report at the time. None has sought bankruptcy protection. In September, Brown signed a bill allowing a state takeover and emergency loan to the Inglewood Unified School District near Los Angeles.

To contact the reporter on this story: James Nash in Los Angeles at Jnash24@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman in New York at smerelman@bloomberg.net.

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