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Dos Palos-Oro Loma Joint Unified School District Cash Management Update. Ann Hern, Director, Management Consulting Services School Services of California. The Importance of Cash Flow. 1. Cash flow is an important factor in determining the fiscal health of a local educational agency (LEA)

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dos palos oro loma joint unified school district cash management update

Dos Palos-Oro Loma Joint Unified School DistrictCash Management Update

Ann Hern, Director, Management Consulting ServicesSchool Services of California

the importance of cash flow
The Importance of Cash Flow

1

  • Cash flow is an important factor in determining the fiscal health of a local educational agency (LEA)
  • Many LEAs, including Dos Palos-Oro Loma Joint Unified School District, are using reserves to balance their budgets
    • Using reserves affects future cash flow
      • Fewer reserves means less cash
  • It is possible to maintain the mandated level of economic reserves, yet be out of cash
  • Cash shows no mercy – you either have it or you don’t
state cash flow management
State Cash Flow Management

2

  • Weak revenues and limited credit have continued to reduce the state’s cash resources
    • The enactment of the 2009-10 Budget Act contained cuts and ABX8 5 (Chapter 1/2010) and ABX8 14 (Chapter 10/2010) added cash deferrals that will help the state’s cash flow situation
    • AB 191 (Chapter 29/2010) helped LEA’s June 2010 cash flow on a one-time basis
  • The continuing effects of the deferrals adversely affect school agency cash flows and cash reserves
    • Will this continue – and even get worse – for local agencies?
      • Yes
        • You need to be prepared for cash contingencies
budget vs cash
Budget vs. Cash

3

  • Budgets and cash flow plans are separate documents
    • Budgets are revenue and expenditure plans that balance out over the course of an entire year
    • Cash flow plans detail how an entity will meet its expenditures each month and will indicate when an entity has to use borrowing options to meet its cash demands
  • In good years, when revenues keep pace with expenses and there are no deferrals, the cash flow situation for LEAs improves
  • But in bad years, when deferrals exist and expenditures outpace revenues, cash flow deteriorates
    • And the need to borrow and the frequency of borrowing increase
cash borrowing options
Cash Borrowing Options

4

  • School agencies are allowed to borrow cash to meet cash flow demands
    • There are internal and external borrowing options
    • For all options:
      • The cash be must paid back within a year or less
      • The proceeds from borrowing can be used for any operational purpose
  • This type of borrowing is not a financial bailout
    • Because it is short term and needs to be paid back
cash flow options for school agencies
Cash Flow Options For School Agencies

5

  • Option #1: Internal borrowing (Education Code Section [E.C.] 42603)
    • Provides that money in other funds may be temporarily transferred to another fund for payment obligations
      • No more than 75% of the money held in the fund can be transferred
      • Funds shall be repaid in the same year, or the following year if borrowed 120 days before the fiscal year end
  • Option #2: External borrowing
    • Tax and Revenue Anticipation Notes (TRANs) are short-term, interest-bearing notes issued by a district in anticipation of taxes and other revenues; the TRANS must be repaid with funds received or accrued from the fiscal year in which it was issued
    • County office of education (COE) – E.C. 42621 and 42622 allow COEs to loan funds to districts
  • Option #3: Borrowing from the county treasurer
    • E.C. 42620 requires county treasurers to loan money to school districts
cash borrowing options1
Cash Borrowing Options

6

  • Remember that all of these options require that the agency is able to pay back the borrowing within a year at most
  • What happens if you can’t?
    • It’s “game over”
      • A state bailout loan is needed, which typically comes with a state takeover
      • The Superintendent is released
      • The state appoints a State Trustee and the District loses local control
  • Fund balance can be low or negative, but cash cannot
    • This is why cash is king!
focus on reserves
Focus on Reserves

7

  • The unrestricted ending fund balance is a focal point for determination of fiscal status
    • It is important to estimate and evaluate it very carefully
    • Adjustments need to be made with each budget update
    • Communicate the changes frequently and provide a reconciliation of the changes
    • Monitor the balance closely for its impact on cash flow
  • The ending fund balance isn’t all cash
    • Many of the components of an LEA’s assets on the balance sheet are not “cash in the County Treasury”
2009 10 estimated ending balances
2009-10 Estimated Ending Balances

8

Does not include TRANs pledge payments

multiyear projection
Multiyear Projection

9

  • These multiyear projections are for the General Fund:
multiyear projection1
Multiyear Projection

10

*Based upon total General Fund expenditures

district 2010 11 cash flow projection
District 2010-11 Cash Flow Projection

11

  • The cash flow projection for 2010-11 without any current year borrowing in place and repaying prior-year borrowing is as follows:
district 2010 11 cash flow projection1
District 2010-11 Cash Flow Projection

12

  • The cash flow projection for 2010-11 with current-year borrowing in place and repaying prior year borrowing is as follows:
fiscal solvency recovery plan
Fiscal Solvency Recovery Plan

13

  • In order to restore the District's cash solvency, a budget reduction plan needs to be adopted
    • The District’s Unrestricted General Fund expenditures for 2011-12 need to be reduced by approximately $400,000
    • The long-term effects of reducing expenditures:
      • Eliminate dependency on Inter-Fund borrowing from Fund 40
        • As the capital building project at the high school proceeds, the capacity of Fund 40 to loan cash to other funds will be diminished
      • Allows for TRANs to be repaid with revenue generated in the year the TRANs is issued
      • Enables the General Fund to loan cash to other cash-needy funds: Child Nutrition and Child Development
      • And most importantly increase the reserve level which will generate a positive ending fund balance in the General fund by June 30, 2012!
fiscal solvency recovery plan1
Fiscal Solvency Recovery Plan

14

2010-11

2011-12

2012-13

2013-14

2014-15

Includes TRANs pledge payments

No inter-fund borrowing needed

closing thoughts
Closing Thoughts

15

  • Remember that cash is king
    • Balance your budget now
      • Restore the reserves
        • The state mandated reserve level is woefully inadequate
          • A 3% reserve will only cover about 40% of the District’s monthly payroll obligation
        • Reduce the dependency on inter-fund borrowing
        • As balances in other funds are spent down, the availability of cash that can be loaned to the General Fund is reduced
      • Diminish the use of reserves
        • Reserves are one-time money and they will not last forever!