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 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 1

State Cash Flow Management Weak revenues and limited credit have continued to reduce the state’s cash resources The enactment of the 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 2

Budget vs. Cash 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 3

Cash Borrowing Options 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 4

Cash Flow Options For School Agencies 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 and allow COEs to loan funds to districts Option #3: Borrowing from the county treasurer E.C requires county treasurers to loan money to school districts 5

Cash Borrowing Options 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! 6

Focus on Reserves 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” 7

Estimated Ending Balances Does not include TRANs pledge payments 8

Multiyear Projection These multiyear projections are for the General Fund: Total Revenues$ 19,428,075$ 19,393,060$ 19,598,531 Total Expenditures $ 19,812,558$ 19,354,653$ 19,735,220 Surplus/Deficit$ $ 38,407$ 9

Multiyear Projection Beginning Fund Balance $ 1,000,335$ 615,852$654,259 Surplus/Deficit$ $ 38,407$ Ending Fund Balance $ 615,852$654,259$517,570 Required 3% Reserve* $ 594,377$ 580,640$ 592,056 Excess/Deficiency$21,475$73,619$ *Based upon total General Fund expenditures 10

District Cash Flow Projection The cash flow projection for without any current year borrowing in place and repaying prior-year borrowing is as follows: JulySeptemberJune Beginning Cash$134,138$906,070($313,322) Receipts$161,788$1,763,949$705,820 Disbursements($1,439,809)($1,670,545)($1,566,111) Prior-Year Transactions $2,045,949$462,585$0 TRANs$0$1,640,000$0 Inter Fund Borrowing$450,000$0 Net Increase/Decrease$317,928($1,084,011)($860,291) Ending Cash$452,066(177,941)($1,173,613) 11

District Cash Flow Projection The cash flow projection for with current-year borrowing in place and repaying prior year borrowing is as follows: JulySeptemberMayJune 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) Prior Year Transactions $2,045,949 $462,585$0 TRANs 09/10 TRANs 10/11 $0 $1,640,000 ($1,600,000)$400,000 Inter-Fund Borrowing $450,000$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 12

Fiscal Solvency Recovery Plan 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 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! 13

Fiscal Solvency Recovery Plan Includes TRANs pledge payments No inter-fund borrowing needed

Closing Thoughts 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! 15