Cash Flow Tools for Budget Deficits

By Jim Schiele

This fall, many Texas school districts are facing financial uncertainty, and some are making tough decisions to avoid a full budgetary crisis. With approximately half of all Texas school districts adopting deficit budgets in the past year, many district leaders are finding themselves in an unfamiliar environment where fund balances are dwindling below 90 days.

Maintaining fund balances and consistent cash flows help districts pay bills and meet payroll in the fall months before tax collections begin to replenish cash reserves.

As I have spoken with district leaders coping with this new normal, it is clear that we need new tools to project cash flows in our current deficit environments.

I have developed a cash flow spreadsheet that allows districts to monitor cash flows in detail and update funding sources throughout the year, projecting when negative cash flows may happen and planning in advance for options that can ensure financial obligations are met.

Cash Flow Considerations

1. Revenues are not uniform throughout the year.
State aid payment schedules are dependent on the relative wealth of the district. The TEA website contains essential information on your district’s expected payment schedule.  Likewise, property tax revenues come primarily in December and January. Review previous year’s revenue flow to calculate the timing of those receipts.

2. Payroll expenses can be predicted.
Expenses can be inconsistent, although the payroll, which is generally paid in equal amounts over the year, smooths the fluctuations. Previous expenses can be used to predict variances on a month-to-month basis.

3. Capital expenditures should be planned.
Special payments such as capital improvements or equipment replacement should be reviewed and included in the appropriate month’s budget. These activities should be budgeted when there is a substantial fund balance.

4. Most cash flow is negative.
The district receives most of its revenue from tax collections in December and January, meaning this revenue must be managed carefully throughout the year.  

5. Mind the fall gap.
You will no doubt notice that in October and November your district may end the month with just a few days of operational expenses in the bank. As a previous CFO, I can tell you this is simply not sufficient. Running cash reserves to this level puts the district at risk of failing to make payroll or to pay bills on time.

Actions for Critical Levels of Cash Balances

If you find cash flow at a critical level, there are some actions you can take to alleviate the problem.

1. Consult your Financial Advisor (FA).
This is their area of expertise and the role they serve for the district. If you have not issued bonds recently or are looking for a new financial advisor, we can help with the procurement process; but it is critical that you have the FA position filled for your district.

2. Review short-term loan options.
The following options are not supported by the permanent school fund and rely on the financial rating of the school district. Preparation for these ratings calls should not be taken lightly. Your financial advisor can help you prepare for the ratings call. Linebarger can also assist in putting information together for these events. There are four main options:

Line of credit (LOC): This option may be the simplest to communicate to the school board and the community. However, this may be the most expensive option depending on the line of credit terms and the interest rate accessed.

Term loan: A term loan may be a viable option when the borrowing period is short, the interest rate is fixed, and the funds are earmarked for a specific use. The payback amount is easily calculated but may not be the best financial option for the district.

Maintenance Tax Notes: If a district has major equipment purchases or remodeling projects, a maintenance tax note can finance these to lessen the impact on cash flow. These notes may bring lower interest costs than a line of credit or a term loan, however, there are also issuance costs that need to be considered.

Tax Anticipation Notes (TANs): These notes are issued by the district and paid back when property tax collections are received. Because these notes may be tax exempt, the cost of borrowing is lower than other options. The district can invest the funds from TAN in financial vehicles that produce a rate of return higher than the district is paying to borrow. The potential return helps offset the cost of issuance of the TAN and potentially part of the interest cost as well.

Meet the Challenge

This is a challenging time to manage school budgets. Use this cash flow spreadsheet to review your cash flow model and forecast multiple years in advance. Your model will change so plan to update it frequently. It will help guide you to make the decisions that will ensure your district has sufficient cash on hand to meet your obligations.

If cash flows dip to critical levels, discuss financial options with your district’s financial advisor and select the ones that make the most sense for your district. The financial advisor can present options to the board along with reasons for their recommendation.

Jim Schiele is Linebarger’s School Financial Consultant. He helps Texas school districts navigate budgets and meet financial deadlines that can impact their district’s funding and writes regularly on financial topics for our clients. He can be reached at [email protected].

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