Dos Palos-Oro Loma Joint Unified School DistrictCash Management Update

Ann Hern, Director, Management Consulting ServicesSchool Services of California

The Importance of Cash FlowCash 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

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State Cash Flow ManagementWeak 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

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Budget vs. CashBudgets 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

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Cash Borrowing OptionsSchool 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

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Cash Flow Options For School AgenciesOption #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 transferredFunds shall be repaid in the same year, or the following year if borrowed 120 days before the fiscal year end

Option #2: External borrowingTax 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 issuedCounty office of education (COE) – E.C. 42621 and 42622 allow COEs to loan funds to districts

Option #3: Borrowing from the county treasurerE.C. 42620 requires county treasurers to loan money to school districts

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Cash Borrowing OptionsRemember 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!

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Focus on ReservesThe 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”

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2009-10 Estimated Ending Balances

-$400,000

-$200,000

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Estimated Fund Balance

Estimated Cash Balance

$1,000,335

-$315,862

2009-10

Does not include TRANs pledge payments

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Multiyear ProjectionThese multiyear projections are for the General Fund:

2010-11 2011-12 2012-13Total Revenues $ 19,428,075 $ 19,393,060 $ 19,598,531Total Expenditures $ 19,812,558 $ 19,354,653 $ 19,735,220

Surplus/Deficit $ <384,483> $ 38,407 $ <136,689>

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Multiyear Projection

2010-11 2011-12 2012-13Beginning Fund Balance $ 1,000,335 $ 615,852 $654,259

Surplus/Deficit $ <384,483> $ 38,407 $ <136,689>Ending Fund Balance $ 615,852 $654,259 $517,570

Required 3% Reserve* $ 594,377 $ 580,640 $ 592,056

Excess/Deficiency $21,475 $73,619 $<74,486>

*Based upon total General Fund expenditures

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

July September JuneBeginning Cash $134,138 $906,070 ($313,322)Receipts $161,788 $1,763,949 $705,820Disbursements ($1,439,809) ($1,670,545) ($1,566,111)Prior-Year Transactions $2,045,949 $462,585 $0

TRANs $0 $1,640,000 $0Inter Fund Borrowing $450,000 $0 $0

Net Increase/Decrease $317,928 ($1,084,011) ($860,291)

Ending Cash $452,066 (177,941) ($1,173,613)

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District 2010-11 Cash Flow Projection The cash flow projection for 2010-11 with current-year borrowing in place and repaying prior year borrowing is as follows:

July September May June

Beginning Cash $134,138 $906,070 $2,062,245 $886,678

Receipts $161,788 $1,763,949 $790,544 $705,820

Disbursements ($1,439,809) ($1,670,545) ($1,566,111) ($1,566,111)Prior Year Transactions $2,045,949 $462,585 $0 $0

TRANs 09/10 TRANs 10/11 $0

$1,640,000

($1,600,000) $400,000 $400,000

Inter-Fund Borrowing $450,000 $0 $0 ($400,000)

Net Increase/ Decrease $317,928 $515,989 ($1,175,567) ($860,291)

Ending Cash $452,066 $1,422,059 $886,678 $26,387

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Fiscal Solvency Recovery PlanIn 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 $400,000The long-term effects of reducing expenditures:

Eliminate dependency on Inter-Fund borrowing from Fund 40As 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 issuedEnables the General Fund to loan cash to other cash-needy funds: Child Nutrition and Child DevelopmentAnd most importantly increase the reserve level which will generate a positive ending fund balance in the General fund by June 30, 2012!

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Fiscal Solvency Recovery Plan

-$500,000

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Ending Fund BalanceEnding Cash Balance

Includes TRANs pledge payments

No inter-fund borrowing needed

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2010-11 2011-12 2012-13 2013-14 2014-15

Closing ThoughtsRemember that cash is king

Balance your budget nowRestore 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 borrowingAs 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!

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