Keygent LLC Discusses a Short-Term Borrowing Option

You often hear discussions about California school and community college districts utilizing financial instruments, such as municipal bonds, to finance the construction or upgrading of their facilities. But what if a district needs additional funding for their day-to-day operations? In the complex financial landscape of California’s school and community college districts, securing stable funding is an ongoing challenge. To ensure they can meet their operational needs throughout the fiscal year, districts may use tax and revenue anticipation notes to help manage their cash flow. Chet Wang of Keygent LLC walks us through what tax and revenue anticipation notes are and why a school or community college district may consider issuing them.

First, let’s look at how California school and community college districts are funded. Districts’ operations are funded through a combination of federal, state, and local revenue sources. The largest share of funding usually comes from the state, which allocates funds based on the Local Control Funding Formula, or LCFF. LCFF was implemented by the state with the goal to provide a more equitable distribution of funding to districts, taking into account factors such as student demographics and socioeconomic conditions. Federal funding supplements state funding received, supporting various programs such as special education initiatives. Local funding is derived mainly from property taxes, with a bulk of it collected by counties in December and April, within the boundaries of each district. In some instances, districts may receive their funding primarily from local funding. These districts sometimes face budget deficits due to the timing of the collection of property taxes.

Chet Wang of Keygent LLC explains, “To address gaps in cash flow due to the timing of property tax collections, school and community college districts may elect to utilize tax and revenue anticipation notes to manage their cash flow effectively.” Tax and revenue anticipation notes, or TRANs, are short-term debt instruments issued by school districts to meet short-term cash flow needs. Here are some key features of TRANs:

1. Short-Term: TRANs typically have a maturity date ranging from a few months to 13 months, aligning with the timing of anticipated tax revenues. Due to the short financing term of TRANs, they generally have a low overall cost of borrowing.
2. Secured by Anticipated Revenues: TRANs are secured by the future property tax revenue stream that the school or community college district expects to receive.
3. Flexible Repayment Structure: Repayment of TRANs is structured to coincide with the timing of expected property tax receipts. Typically, districts will set money aside, which coincide with expected property tax receipts, to repay the TRANs by its final maturity date.

Issuing tax and revenue anticipation notes provides California school and community college districts the ability to effectively manage cash flow throughout the fiscal year, by addressing the timing misalignment between the receipt of property tax revenues and ongoing operational expenses for districts. TRANs provide a financial bridge, ensuring schools can sustain their operations, such as staff salaries and funding of essential programs, without interruption. The short-term nature of TRANs makes them a cost-effective financing option, minimizing the overall borrowing cost for districts. By issuing TRANs, districts stabilize their budgets, promoting financial stability and continuity in educational services.

When considering issuing tax and revenue anticipation notes, California school and community college districts may want to consult a municipal advisor. A municipal advisor can assist the district with structuring the TRANs to ensure that cash flow deficits are met along with sizing the note properly to avoid borrowing more than necessary. Additionally, a municipal advisor can help a district determine the timing and best method of sale for its TRANs to obtain a lower interest rate to reduce the overall borrowing cost. By utilizing the expertise of a municipal advisor, districts can navigate the complexities of issuing municipal debt and make informed decisions.

By providing a cost-effective means of managing cash flow, tax and revenue anticipation notes contribute to the stability and continuity of educational programs. As districts continue to face fiscal challenges, understanding and strategically utilizing TRANs will remain essential in ensuring the sustained success of California’s school system. Issuing TRANs empowers California school and community college districts to navigate fiscal challenges, maintain operational efficiency, and continue to provide quality education for their students.

Keygent LLC is a municipal advisory services firm located in El Segundo, California. Keygent has experience with assisting California school and community college districts with the issuance of their tax and revenue anticipate notes. If you would like to learn more about TRANs, please visit www.keygentcorp.com.