School District Cash Flow Shortfalls Likely to Grow

by Joel Sutter, and Jodie Zesbaugh Financial Advisors

This has been a challenging year for Minnesota school districts to manage their cash flow, and looking forward to fiscal year 2010-11, school district cash flow shortfalls are likely to increase.

State Aid Reductions and Delayed Payments
This year began with Governor Pawlenty announcing last summer, as part of his unallotments, that the percentage of state aid entitlements paid to districts in the current year would be reduced from 90% to 73%. This saved the State approximately $1.2 billion in the current biennium. But it created cash flow deficits for many districts that hadn't experienced deficits the prior year, and created larger deficits for other districts. Many districts issued Aid Anticipation Certificates (AACs) in 2009 to fill the gaps created by the State's action.

In early January, we began hearing that the State of Minnesota was considering a further delay in state aid payments to some school districts based on a little-known law (Minnesota Statutes, Section 127A.46). Ehlers immediately began talking to State officials and representatives of educational organizations about what the State was considering. We also began exploring solutions to get our clients through these further delays. In January and February, Ehlers sent four separate bulletins to our clients to inform them of the State's plans and to suggest possible solutions.

How Some of Our Clients Responded
Many of our school district clients have been working with us throughout this process to analyze and implement solutions to these short-term delays

• Some districts had enough cash in short-term investments and liquid funds to survive the delays by simply drawing down those balances.
• Other districts are "cashing in" some fixed investments prior to their maturity dates.
• Some districts have negotiated lines of credit with financial institutions.
• We assisted several districts issue short-term (four-to-six month) AACs. By implementing a streamlined approach to selling AACs, we reduced both the amount of time needed and the upfront issuance costs, while still keeping interest rates very low (under 0.67%).

What Can We Expect in FY2010-2011?
Looking forward to fiscal year 2010-11, school district cash flow shortfalls are likely to increase. The Governor has proposed a further delay of $600 million in state aid payments to all school districts through a property tax recognition shift. State officials have also announced that they may need to implement additional delays under Minnesota Statutes, Section 127A.46. Ehlers staff has been working closely with representatives of several education organizations (MASBO, MSBA, and MASA) to advocate for changes in State law that will ease the financial burden on school districts of these delays.

Regardless of what statutory changes are made this spring, it seems inevitable that more districts will need to use cash flow borrowing next year - and in larger amounts - than in any recent year. Ehlers recently sent information to all of its school district clients about options and schedules for issuing AACs for the next fiscal year. For a copy of that information, or to discuss your options further, contact any Financial Advisor on the Ehlers Education Team.