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ASK THE STAFF

March/April, 2010

Transfers, short-term borrowing offer options

The question for this issue is answered with information adapted from Essentials of Illinois School Finance, Fourth Edition, by James B. Fritts, and from other sources listed at the end of the article.

Question: We are quickly approaching a financial crisis in our district because of slow state payments, defaults in property tax payments and home foreclosures. How can we meet our obligations?

Answer: A district may be able to use existing monies, thereby avoiding the expenses of issuing and paying interest on debt. Surpluses in some funds can be temporarily loaned or permanently transferred to other funds as specified by state law. Board of education approval is required for an interfund loan or transfer, and public notice and a public hearing are required for certain interfund transfers.

Interfund loans may be made among the educational, operations and maintenance, and transportation funds. Loans may also be made from these funds to the life safety fund. Money in the working cash fund may be loaned to other funds.

Interfund loans are a solution to short-term balance problems in one or more funds. Money must be repaid to the loaning fund within three years, except working cash fund loans, which must be repaid upon the collection of anticipated taxes, unless tax anticipation warrants are outstanding.

Transfers are usually made from the smaller to the larger funds, and therefore produce a limited, but "longer-term" benefit to the receiving fund. Transfers require a resolution preceded by a legally noticed public hearing. Transfers are permissible among the educational, operations and maintenance and transportation funds, but after June 30, 2010, they will be limited to one-time non-recurring expenses.

A working cash balance can be transferred into the education fund, but not to the operations and maintenance or transportation funds. The working cash fund may also be abated, although the parameters of such abatements are subject to legal interpretation. Consult the district's attorney before taking such action.

In addition to the above provisions, the school board has general authority to transfer interest from the fund in which it was earned to the fund(s) most in need of it. Transfers of working cash and debt service interest must meet specific provisions. In addition, transfers from the tort immunity fund are limited to certain "financially distressed" districts. Consult the Illinois School Code for specific provisions and exceptions governing interest transfers, especially when the earnings and transfers occur across two fiscal years.

If fund transfers will not meet the district's needs, the School Code provides districts with options for short-term borrowing instruments to meet operating expenses.

These instruments are designed to provide short-term cash to cover expenditures when cash balances are low and expected property taxes and other revenue have not been received.

The need for them must be proven by financial projections as specified in federal law. They do not require public approval in a referendum, nor do they provide additional money to the district. Rather, they speed up receipt of money to which the district is already entitled.

Frequent use of these forms of debt indicates current or impending financial difficulty. Conversely, failure to use them can create a liquidity crisis and distasteful consequences. A policy on cash flow borrowing is helpful in alerting the school board and administration to the need to borrow.

Some short-term cash flow borrowing options are listed below. Repayment requirements exist for each form of short-term debt and can be found in the Illinois School Code.

  • Tax anticipation warrants are issued against taxes levied but not yet collected and are repaid from the taxes levied for the particular fund against which they are issued, either upon their receipt or on a specified maturity date.
  • State aid anticipation certificates and revenue anticipation notes may be issued respectively in anticipation of general state aid payments and revenue sources such as federal aid, state revenues or local fees.
  • In lieu of issuing tax anticipation warrants, a school district having a population of 500,000 or less may issue notes, bonds or other obligations and, in connection with that issuance, establish a line of credit with a bank.
  • Teachers' orders are issued to pay wages of teachers when there is no money in the education fund. They are repaid when funds are available and can also be repaid by the issuance of funding bonds.

Consultation with an attorney and/or financial consultant is advisable in planning to issue short-term debt, especially in light of current debt market conditions.

Editor's note: Information quoted from the upcoming 2010 revision of Essentials of Illinois School Finance and additional information for this article was drawn from the following sources:

Information on interfund loans and transfers was adapted from A School Board Member's Handbook, 2009 Edition, published by Hodges, Loizzi, Eisenhammer, Rodick and Kohn, and from Illinois School Law Survey, 10th Edition (2008) by Brian A. Braun, published by and available from IASB.

The summary of provisions regarding short-term borrowing instruments was drawn from information furnished by financial consultants Elizabeth Hennessy and Nora Sloan Joyce of William Blair & Company and Tammie Beckwith Schallmo of PMA Financial Network, and from Illinois School Law Survey.

To obtain a copy of Essentials of Illinois School Finance, visit the IASB bookstore at www.iasb.com/shop/.

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