Print this Article

California's Cash Flow Situation Worsens:

Educators Should Be On High Alert

By Tahir Ahad (TSS) and Brett McFadden (ACSA) - June 12, 2009

Earlier this week, State Controller John Chiang released his latest figures on state revenues and projected cash flow.  State revenues continue to plummet, with projections that the state will run out of available cash by July 28.

Adding fuel to the fire, the governor announced yesterday that he will block all attempts by the State Controller and others to secure a temporary loan for the state.  The governor stated that this action would merely give the Legislature a further excuse to delay the budget and put off critical decisions that need to happen now.

This news does not bode well for school districts and county offices of education.  When the state experiences a cash flow problem, the state possesses unique ways to make it our problem.

State revenues and cash flow

The state’s fiscal situation continues to worsen at an unprecedented pace.  The state has been experiencing cash flow deficiencies on and off for the better part of 24 months.  The latest figures, however, indicate the situation has gone beyond critical.  According to the State Controller:

  1. Absent legislative action, the state will not have sufficient cash to meet its primary payment obligations as early as July 28, 2009.  By July 31, the state’s cash deficit will reach an estimated negative $2.78 billion.
  2. Absent corrective action, this course will ultimately lead to a negative $25.3 billion cash deficit by April, 2010.  This would be five times the $5.1 billion cash deficit faced by the state this past spring – which was, at the time, the worst cash deficit California had ever faced.

This further deterioration is the result of two factors:

  1. May revenues came in $827 million less than projected (they were already projected to be lower than last year).
  2. Adjustments made by the Department of Finance to its revenues and expenditure trends project further decreases to state revenues.

The state’s borrowing capability

Unless the Governor and Legislature act quickly, the state will essentially run out of cash in less than 50 days.  This, above all else, will drive a budget agreement by early July.  The state will need to demonstrate to borrowing agencies that it has enacted long term solutions that will improve the state’s cash flow and ability to repay short term borrowing mechanisms.

The state’s borrowing capability is already compromised.  California has the worst credit rating of any state in the nation.  Without a viable solution in place, it will be increasingly difficult for the state to borrow sufficient amounts to cover projected cash deficits in 2009-10.

What this means for school districts and county offices

Any final 2009-10 budget solutions will have to include immediate cash solutions.  This translates into definite program cuts and possible additional Proposition 98 apportionment deferrals in 2009-10.

Proposition 98 revenue limit and categorical funding are paid out to school districts and county offices via the state apportionment system.  In short, local education agencies (LEAs) receive apportioned funding amounts on roughly a monthly basis.  But the amount of funding can vary greatly depending on the month.

As such, in normal years (remember those?) many LEAs would experience cash deficits in the fall of each year.  In anticipation of this, these LEAs typically secured a Tax Revenue Anticipation Note (TRAN) or other short-term borrowing mechanism. Although the TRANs were justified based on the property tax receipt schedule, they did help with the cash flow issues caused by a delayed release of state funds.

The challenge with such short term borrowing strategies is that they take some time to prepare.  LEAs typically need at least 4-6 weeks to secure short term borrowing mechanisms.  They also need to know how much they are going to need, and for how long.

Over the past year two years, the state has relied heavily on numerous Proposition 98 apportionment deferrals as a way to address its own cash flow concerns.  As a result, a significant amount of LEA apportionments have been delayed within the fiscal year and/or into the next fiscal year (see Education Funding Deferrals article below). 

Combining what has already been approved in previous state budgets, and what has been proposed in the 2009 May Revision, roughly 12 percent of Proposition 98 funds provided for in 2009-10 school operations would not be paid until 2010-11.  This is a significant sum considering that most school operations include fixed costs that are not easily moved or deferred.  And this amount only includes interyear deferrals, it does not include intrayear deferrals whereby payments are delayed several months within a fiscal year.

Recommendations for school leaders

For the next two years, keeping a close eye on your LEA’s cash flow will be critical.  School leaders will need to know how much state and federal aid is coming in – and when – compared against what fiscal obligations they have locally.  It is critical that school districts work closely with their county office of education for AB 1200/2756 fiscal reporting.

LEAs should download the apportionment schedule off the California Department of Education website to project their own apportionments of the state funds, and should avoid using “same-as-the-last-year” approaches.  Also, in developing your cash flow analysis, attention should be paid to identifying different categories of expenditures.  Remember, many costs are due when they are due, but flexible costs and payments can be deferred and delayed based on your current cash flow situation.

More than ever before, LEAs will need to continually update their cash flow statements and keep them current based on the latest information and cash receipts.  The situation is likely to change frequently, with significant impact on cash flow.

Developing a multiple scenario contingency plan may also be helpful.  You should plan out now what you will do if the situation gets worse (or better).  You do not want to be stranded during the year with no option if the situation worsens.

We in the field of education are used to thinking in silos.  At times, different units of the organization move independent of each other, unaware of the bigger picture.  Make sure that the message is conveyed that all purchases and cost commitments are approved in advance by the Chief Business Official with an eye on the cash flow situation.

Just because your instructional material fund shows a huge balance does not mean it is necessarily feasible to purchase new textbooks for adoption this year. You may not want to incur a substantial expense (or even a small one) at an inopportune time.

Caution should be exercised and the spending should be limited to meeting payroll, as well as unavoidable and essential expenses such as life and safety items.

Please remember that money can be transferred between funds to cover expenses, but a school board resolution authorizing the administration to do so should be put in place first.

Editor's Note: Tahir Ahad is President of educational consulting firm Total School Solutions (TSS), and Brett McFadden is Management Services Executive at Association of California School Administrators (ACSA).