Wisconsin School District Cash Flow Borrowing. What is Cash Flow Borrowing? Purpose/Need for Borrowing. Sample Home Budget

Transcription

1 Wisconsin School District Cash Flow Borrowing Thursday, August 18 th WASBO New School Administrators & Support Staff Conference Allison Buchanan Partner Quarles and Brady LLP Nathan Jaeger Business Manager Whitewater Unified School District What is Cash Flow Borrowing? Annual process Provides funds for periods of cash shortfalls If needed, the borrowing provides sufficient funds to operate Cash flow analysis determines amount and timeframe Several funding options available 1 Purpose/Need for Borrowing Sample Home Budget Revenue Expenditures 2 1

2 Revenues vs. Expenditures Total Receipts Total Disbursements The hypothetical example is for illustrative purposes only. 3 Purpose/Need for Borrowing Expenditures fairly constant throughout year Salaries / Fringe typically 75%-85% of budget Typically spread over 24 or 26 pay periods May need to adjust for end-of-year pay Revenues received sporadically throughout the year Tax Levy and Equalization Aid can be 85%-95% of general fund revenue budget Received in scheduled months July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June Tax Levy X X X X Equalization Aid X 15% 25% 25% 35% 4 Monthly Cash Balances Without Borrowing With Borrowing 5 2

3 Considerations Fund Balance Fund balance does not equal available cash Decreasing fund balances Inability to increase proportionately to expenditure growth Fluctuation in Equalization Aid More revenue limit dollars received through tax levy Timeline for receiving revenue shifted Revenues & Expenditures Increase/Decrease in revenues and/or expenditures Spending that could impact current year borrowing (i.e. spend down fund balance, large purchase, etc.) Cash flow borrowing impact unique to each district Other Borrowing Needs Bank qualified limits Lowest overall costs Multiple year analysis 6 Considerations Employee Handbook Salary and Benefits offered Timing of Payments (i.e. Salary vs. Merit Pay, Ongoing Benefits vs. One-Time Contribution) Communication and Timing Understand and communicate borrowing options Start discussions early First time need to borrow? Monitoring Cash Flow During Business Office Transitions Conventional Tax and Revenue Anticipation Promissory Note (TRAN) Line of Credit (LOC) Other Lenders (i.e. a Municipality) 7 Cash Flow Analysis and Other Considerations 8 3

4 Determining a Shortfall/Surplus Complete a cash flow analysis Funds 10, 27, 50 & 80 Analyze expenditures and revenues on a cash basis Past years may be helpful in analysis, but account for changes in expected revenues and expenditures For example: Passed revenue limit referendum Large anticipated one time expense Change in legislation (i.e. Act 10) Shift in timing of receipt of revenues (property tax district versus aid district) 9 Sample Cash Flow Analysis The hypothetical example is for illustrative purposes only. 10 Increased Attention to Cash Flow Borrowing Before the Great Recession: Positive arbitrage Districts could borrow funds and reinvest at higher rate Resulted in larger and longer borrowings Since the Great Recession: Situation has changed Investment rates have drastically decreased Districts are looking to limit amount and length of borrowings Exploration of other non-traditional borrowing alternatives 11 4

5 Funding Options General Characteristics Tax and Revenue Anticipation Notes ( TRANs ) Traditional financing method One or two maturity(ies) Less than 13 months Fixed tax-exempt rate Legal requirements apply Line of Credit ( LOC ) Draws and repayments Goal to minimize days outstanding Taxable rate (usually variable) Legal requirements apply Other Lenders Other public entity Local municipality Legal requirements apply 12 Outlook for Districts will explore alternative options Some districts will borrow for the first time Borrowing needs may change Limiting borrowing amount and duration will continue Constant monitoring of market to determine best borrowing alternative 13 Process for Issuing a TRAN One Month Prior Two Weeks Prior One Week Prior Day of Board Meeting Minimum of one week after board meeting Project revenues and expenditures through cash flow analysis process Determine shortfalls Determine amount and time period for borrowing Prepare documentation Identify terms/specifications for bids Send documentation to Bond Counsel for review Forward bid documents and financial statement to potential bidders if conventional TRAN option is used and/or to banks if line of credit option is used Take bids for conventional TRAN or proposals from banks for line of credit Borrowing awarded to lowest bidder for conventional TRAN or best proposal from bank for line of credit Closing Date funds are needed 14 5

6 Legal Considerations 15 Cash Flow Borrowing for Wisconsin School Districts General Considerations Timing issues School District Fiscal Year: July 1-June 30 Annual Meetings Generally, the borrowing cannot take place until the school district has levied the taxes for operation and maintenance for the fiscal year In a common school district, the tax is levied by the electors at the annual meeting; In a unified school district, the tax is levied by the school board. Timing of Tax Receipts: 74.29, Wisc. Stats. Section requires that on or before August 20, the county treasurer pay all property taxes in full to the school districts and other taxing jurisdictions Timing of State Aids: , Wisc. Stats. 15% the 3 rd Monday in September 25% the 1 st Monday in December 25% the 4 th Monday in March 35% the 3 rd Monday in June 16 Cash Flow Borrowing for Wisconsin School Districts Continued Options for Managing Cash Flow Sufficient Fund Balance Borrow for the Fiscal Year Conventional TRAN Potential Lenders: Banks, Investment Banks, Other Municipalities Advantage: Funds on Hand; Fixed Interest Rate Disadvantage: Interest accrues throughout term of Borrowing Borrow from time to time Line of Credit Potential lender: Primarily District s Bank Advantage: Interest only on outstanding Draws Disadvantage: More hands-on throughout year; usually a higher rate of interest (often a variable rate) 17 6

7 Wisconsin Statutory Requirements (Section 67.12(8)(a)1.) Purpose: For immediate operating expenses. Borrowed amounts must be used for expenses of the current fiscal year (i.e. expenses prior to June 30). Amount: Limited to one-half of estimated current year operation and maintenance receipts. Timing: After tax voted for current year. (For common school districts, after the annual meeting or after the school board levies a tax if the annual meeting fails to do so.) (For unified school districts, after school board votes a tax even if later tax levy/budget adjustments are made prior to November 1.) Term: All loaned amounts must be repaid no later than November 1 of the following school year. Authorization: By School Board resolution including all pertinent details of borrowing and name of lender. 18 Practical Considerations Due to Wisconsin Statutory Requirements Maturity Date: Selected maturity date of cash flow borrowing needs to consider: Timing of State Aids Timing of Final Tax Settlement Timing of Next Fiscal Year s Borrowing Date of Annual Meeting (for Common School Districts) Draw Date: No draws on lines of credit can be made after June 30, the last day of the fiscal year. Any amounts drawn can remain on hand until the maturity date. 19 Practical Considerations Due to Wisconsin Statutory Requirements Continued Approving Resolution: Any borrowing, including a line of credit, must be approved by a resolution adopted by the School Board at a lawfully called, noticed, held and conducted meeting. In order to properly authorize a borrowing, the resolution must be specific and spell out all of the terms of the proposed borrowing. A general or incomplete resolution will not be sufficient. Maximum Rate: While school districts are authorized to borrow at a variable rate of interest (often seen with lines of credit), Wisconsin law requires that a maximum rate must be stated and approved by the School Board. 20 7

8 Open Meeting Law Requirements Section Wisconsin Statutes Meetings Must Be Open Notice Required: To the public To the official newspaper To requesting media Notice Must Include: Date Time Place Subject Matter Additional Notice required for Special School Board Meetings: Section (2) 21 Federal Tax Law In order for interest on a cash flow borrowing to be tax-exempt, federal tax law must be followed. Purpose: School operating expenses, not investment. Amount: The borrowing must be no greater than the working capital deficit on any date plus a "reasonable working capital reserve" consisting of 5% of the aggregate expenditures paid with last year's current revenues (excluding Funds 30 (Debt Service), 40 (Capital Projects) and 90 (Co-op Programs) (Arbitrage Computation Sheet aids in this calculation). Term: The borrowing must be repaid no later than 13 months after the closing date. 22 Federal Tax Law Continued Rebate Requirements: General Rule: Amounts earned by investing borrowed money in excess of the yield on the bonds must be rebated to the IRS unless an exception applies. Exceptions: Two exceptions are available for cash flow borrowings. Small Issuer Safe Harbor 23 8

9 Other Federal Law Requirements Information Reporting: IRS Form 8038-G must be filed (Bond Counsel files) Registered Form Bank Qualified Limitations 24 Federal Securities Law The Rule: SEC Rule 15c2-12 (unless an exemption applies) Initial Disclosure Undertaking to Provide Continuing Disclosure Filing of Event Notices Electronic Municipal Market Access System (EMMA) 25 Recap: Tax and Revenue Anticipation Promissory Notes Conventional vs. Line of Credit Both must conform to Wisconsin law regarding Cash Flow Borrowing including: Approved by a detailed resolution of the School Board For one fiscal year only 26 9

10 Recap: Tax and Revenue Anticipation Promissory Notes Continued Conventional Fixed Amount Fixed Term (no later than November 1 of following fiscal year) Fixed Rate Tax-Exempt Line of Credit Maximum Amount Revolving If variable rate, maximum rate required and banks often request a minimum rate No draws after June 30 Usually taxable rather than tax-exempt so federal tax law requirements do not apply 27 Conclusion Cash flow borrowing by Wisconsin school districts is governed by Wisconsin law Conventional Tax and Revenue Anticipation Promissory Notes Bank Lines of Credit Federal Tax Law Applies for Interest to be Tax-Exempt Federal Securities Law regarding disclosure also applies unless an exemption applies 28 Questions? 29 10

11 2016 Quarles & Brady LLP - This document provides information of a general nature. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation. 11