The number of financially troubled school districts in California is sharply on the rise.

A record 174 districts – about 16 percent of the total– projected that they wouldn’t be able to pay their bills within two years, according to a report released yesterday by the state Department of  Education.

Los Angeles Unified, the state’s biggest district with a budget of $6 billion, is on the watch list, as are some other large unified districts: Elk Grove, Garden Grove, Capistrano, San Juan, Sacramento City, Riverside and two perpetually struggling districts, Oakland Unified and West Contra County Unified.

A year ago, 108 districts were on the observation list, 38 percent fewer.

Most districts that avoided the watch list did so only with great pain, by raising class sizes, eliminating summer school, cutting the school year by five days, dropping all but core academic programs.

The latest report was based on districts’ budget projections as of March. Since then, some districts  have wrenched concessions from unions and laid off teachers to get off the list, at least for the moment. But until Gov. Schwarzenegger signs the state budget for the fiscal year that starts Thursday, districts won’t know if even their conservative revenue projections were optimistic.

Districts that made the list fall in one of two categories. Those that estimate they’ll be in the red a year from now are rated “negative;” they include 14 districts, with Hayward Unified as the largest. The remaining 160 project an inability to pay bills by June 2012.

Making the list bears a price. Fiscally “qualified” will have to pay higher interest rates on borrowed money. With the state delaying payments to districts to balance its own budget, all districts have to borrow short-term. “Negative” districts cannot borrow at all; county offices of education will have to co-sign their loans.

Pointing out that K-12 schools saw budget cuts of $17 billion over the past two years, Superintendent of Public Instruction Jack O’Connell said he has “grave concerns that more and more school districts will face financial crisis unless state lawmakers find solutions to the state budget crisis and provide adequate funding for our schools.”

Others agree. The districts’ next financial report, based on spending and revenue in October, will include projections for the 2012-13 fiscal year, when the picture will turn even darker, unless there is a miraculous economic turnaround.
Temporary state taxes will have run out, and districts must return to the full 180-day school year. They  also will lose temporary flexibility on spending that the Legislature authorized for three years. Even if  lawmakers extend  “categorical” flexibility, many districts’ finances will be dire.