Dos Palos-Oro Loma Joint Unified School District Cash Management Update

1. Dos Palos-Oro Loma Joint Unified School DistrictCash Management Update Ann Hern, Director, Management Consulting ServicesSchool Services of California

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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!

8. 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”

9. 2009-10 Estimated Ending Balances 8 Does not include TRANs pledge payments

10. Multiyear Projection 9 • These multiyear projections are for the General Fund:

11. Multiyear Projection 10 *Based upon total General Fund expenditures

12. 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:

13. 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:

14. 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!

15. Fiscal Solvency Recovery Plan 14 2010-11 2011-12 2012-13 2013-14 2014-15 Includes TRANs pledge payments No inter-fund borrowing needed

16. 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!