Director
Baker Tilly Municipal Advisors
As the Minnesota legislature settles into the 2021 session in Saint Paul, a major priority will be approving the next biennium budget for local governments across the state. The K-12 public education community will once again monitor the news with interest to see the financial impact that legislative decisions will have on public education. While the financial forecast has improved for Minnesota in recent reports, the COVID-19 pandemic has created some cautions regarding the accuracy of the financial forecasts.
In late January, Minnesota Governor Tim Walz presented his state budget proposal for the next two years and outlined his proposals for public education. His proposals total $745 million in new funding highlighted by a 1% increase in general education funding for the 2021-2022 school year, followed by a 2.5% increase the following year. Additional funding under the proposal will go to specific areas, such as enhanced student support services, freezing the special education cross-subsidy and the extension of voluntary prekindergarten programming. While the proposal is a positive sign for public education, much more work is in order before a final budget is approved by all parties.
If the legislature is unable to agree on the education budget for the next several years, or if an agreement is reached with limited new funding for education, then districts may encounter cash flow shortages. If school districts do see cash flow shortages in their future, there are several options to help them through low cash flow periods.
Line of credit
Setting up a line of credit with a financial institution, often the district’s local bank, is a common practice to address short-term gaps in cash flow. The amount the district may borrow is limited to 95% of average monthly operating expenditures from the previous fiscal year, and any borrowing is limited to a term of 45 days. The line of credit requires a board resolution to establish the agreement with the financial institution, and often has the highest interest rates of the borrowing options available to districts.
Advance funding requests
A school district may request to receive advance funding payments that are due to the district for the fiscal year to the county treasurer or the commissioner of education. However, in each case, the county or the state is not obligated to honor the district’s funding request. These options are not requested often, and it should be understood that either entity may reject the request based on cash flow needs that they may have themselves.
Tax and aid anticipation certificates
The most common cash flow borrowing tool that Minnesota school districts utilize is the issuance of tax or aid anticipation certificates. The certificates provide cash needed in the short term by borrowing against either property taxes or state aid that is due to the district. As state aid has become a greater percentage of school district revenue, aid anticipation certificates are used more frequently.
Aid anticipation certificates may be issued for a maximum of 13 months and are backed by the state aid due to the district during the fiscal year that the certificates are issued. The certificates are limited to the lesser of 75% of taxes/aid received by state statute or the federal borrowing limit of 5% of the previous year’s cash expenditures plus the greatest projected monthly cash flow deficit. Both tax and aid certificates are eligible for the Minnesota Credit Enhancement Program, which helps ensure favorable interest rates.
A district may issue certificates as a standalone issue if the timing of the borrowing necessitates that option. A standalone issue often results in higher issuance costs for the district.
The Minnesota Tax and Aid Anticipation Borrowing Program (MNTAAB) is another tool designed to help meet school districts’ temporary cash flow needs. This program combines the borrowing needs of districts across Minnesota in an effort to keep all issuance costs as low as possible. The MNTAAB is endorsed by the Minnesota School Boards Association and the Minnesota Service Cooperatives across the state. The process for participation in the MNTAAB begins in May to June, with required cash flow projections to determine eligibility for borrowing. It concludes with funds distribution to the participating districts in early September.
With proper planning and by understanding the options available, Minnesota school districts can survive the pandemic and fill cash flow gaps for a financially resilient future.
