Deferrals mount, so does cash flow complexity

A couple years ago, the Legislature shifted a $1.1 billion payment to schools a matter of days from late June to early July.

It was the first of what is now $7.3 billion in deferred payments to K-12- with the latest from Gov. Jerry Brown that would add another $2.1 billion to the total and a delay that could run as long as seven months.

While school administrators say deferrals are clearly preferred to outright cuts, the size and the terms of the delays are generating not only significant direct costs but also growing demands on money managers who have to figure out complex new cash flow needs.

The expertise that's needed among staff to do these calculations is a lot more than we had to have only a few years ago," said Renee Hendrick, executive director of business services at the Orange County Department of Education.

"It's not just a question of just doing cash flow," she said. "You've got to do that while you are trying to figure out if you are going to need to borrow money and when the state will be paying you those funds.

"With over $9 billion deferred to different time periods it makes it very complicated," she said. "That's a different level of complexity than districts have had to face anytime in the past."

Indeed, since the February 2009 budget agreement, the Legislature has approved five Proposition 98 payment deferrals that crossed fiscal years. They have also extended or increased four of them.

This year, the LAO reports, 17 percent of Proposition 98 support won't be paid until after the fiscal year has ended. If Brown's latest proposal is approved, the figure would jump to 20 percent next year.

For most districts that means more borrowing.

The easiest solution, said Jeff Small, managing director at Capitol Public Finance Group in Sacramento, is to borrow from funds on hand or from the county pool.

When those options are not available, districts turn to issuing Tax and Revenue Anticipation Notes, which traditionally have provided a tool for smoothing cash flow at a low cost.

But even at today's low interest rates, the cost of issuing TRANs are becoming significant.

Bill McGuire, chief business officer at St. Helena Unified, said this year his district had to issue $5 million in TRANs that cost them about $100,000 in issuance fees and interest. He said next year they are looking at issuing $6.5 million in TRANs next year.

"When you have these kinds of costs for borrowing, you are talking about eliminating jobs to pay for it," he said. "This is just another hidden cut to schools."

Small also pointed out that traditionally TRANs can only be issued and repaid from revenues attributed to the fiscal year in which the TRAN was issued. Districts that have used the vehicle over fiscal years have in some cases attracted the attention of the Internal Revenue Service over interest earnings, he said.

In response, the California School Boards Association has created a TRANs program that allows borrowing that crosses over fiscal years. The program began with the 2009-10 fiscal year and they expect to issue the 2010-2011 cross fiscal year TRAN in February 2011.

Rick Pratt, assistant executive director at CSBA, said the program takes advantage of the state laws enacting the deferrals which require districts to book the delayed payments as prior year revenue. He said the statutory language offers a bit of a loophole from accounting requirements, which wasn't much to overlook when the deferrals were only a matter of a week or ten days - but that's all changed.

"When the deferrals became more than a month or so, this became a bigger deal - now they are talking about much longer deferrals," he said. "That just might pop the bubble on this and it would really cause a lot of problems."

McGuire said that some districts are looking at issuing taxable TRANs, which offer the advantage of fewer restrictions but cost more in interest.

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