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District 15 Cash Management

• District 15 Cash Flow Challenges

• Alternative Approaches for the Annual Low Cash Balance

• What's the Right Level of Cash Reserves?

District 15 Cash Flow Challenges

District 15, like many other school districts in the area, typically has the lowest cash balance just before the 2nd tax distribution is received from Cook County in the late fall or early winter. This low cash balance happens because the 2nd distribution is often much more than six months after the 1st distribution. To put this challenge into perspective, 74% of the district's revenues come from local property taxes.

In 2009 the final tax bills for the tax year 2008 were issued late, which means late payments from taxpayers, which means late payments to District 15. The 1st installment from taxpayers was due March 3, 2009, but the 2nd installment wasn't due until December 1, 2009, almost nine months after the 1st installment.

For this reason school districts strive to maintain an adequate reserve in order to weather this cash flow challenge. District 15's current targeted reserve level is 30% of annual expenditures. The actual reserve balance on June 30, 2009, was $46,694,332, which is 37% of the 2008-09 actual expenditures.

In 2010 the final tax bills are expected to be even later, possibly as late as January 1 or February 1, 2011. However, partially offsetting this is a change that started this year that requires taxpayers to pay 55% of the previous year's tax bill in the 1st installment. This means that the 1st distribution to District 15 will be approximately 10% higher than it otherwise would have been. This will help the late fall and early winter cash flow.

At the March 10, 2010, board meeting the board voted 4-3 to move toward issuing Working Cash Fund bonds to create an "internal bank" that can loan cash to funds at this lean part of the annual cash cycle.

But is this the most cost effective solution to this annual cash crunch?

Alternative Approaches for the Annual Low Cash Balance

Aside from maintaining an adequate reserve, District 15 this year is considering two main alternatives.

The first alternative is to issue Bonds to fund an "internal bank" that can loan cash to the fund accounts during the low cash period. At the March 10 meeting the proposal was accepted to move toward issuing bonds for a $10,000,000 Working Cash Fund, which would have an interest rate of roughly 5.5%. This money is typically only needed 1-3 months during the year so other times during the year this money would typically be invested in CDs, which currently have an approximate annual rate of return of 0.6%. The interest income can be used for the educational fund so this would add roughly $50,000 to the educational fund. However, the net cost to the taxpayers every year would be approximately $500,000, which is the 5.5% interest paid for the bonds offset by the 0.6% income from the CDs for ten months out of the year. In addition, these bonds use some of the district's capacity to issue non-referendum bonds, which otherwise could be used for capital projects.

The second alternative is to issue Tax Anticipation Warrants when and if needed in the December/January timeframe. District 15's reserves were sufficient to avoid the need for Tax Anticipation Warrants in six out of the last seven years. However, this approach was rejected by a majority of the board members at the March 10 meeting. An example of $10,000,000 Tax Anticipation Warrants outstanding for two months at an annual interest rate of 2.0% would cost approximately $33,000. Because Tax Anticipation Warrants are charged to the educational fund this would represent a cost of $33,000 to the educational fund. The net cost to the taxpayers is also $33,000.

While the Working Cash Fund Bonds would add $50,000 to the educational fund balance it does so at a high cost of $500,000 to the taxpayers. Using Tax Anticipation Warrants is clearly more fiscally responsible than using Working Cash Fund Bonds to meet the annual cash flow challenges. The prudent action would be to forecast whether Tax Anticipation Warrants may be needed and include the interest cost in the budget. These interest costs are a tiny fraction of the total District 15 budget, which was $147,439,658 for 2009-10.

What's the Right Level of Cash Reserves?

If the school district . . .

. . . never needs Tax Anticipation Warrants, this means the district is holding too much taxpayer cash.

. . . occasionally needs Tax Anticipation Warrants, this means the district is being prudent in managing its cash flow. There are many factors outside the control of the school district including late Cook County property tax distributions, uncertainty about state funding levels, etc. Achieving an appropriate cash reserve is an extremely difficult endeavor for the District 15 administration and board.

. . . always needs Tax Anticipation Warrants, this means reserves are too low and the board needs to take action to balance its reserve levels with the annual cash cycle.