Mind the (Cash Flow) Gap: Borrowing Options

The State of Michigan’s new fiscal year begins on October 1 and, as of this newsletter’s publication date, the Legislature has not yet passed a state budget. For schools, this uncertainty creates multiple concerns. Without an approved budget, state aid payments could be delayed or disrupted, leading to cash flow challenges.

While these concerns are understandable, it is important not to panic or resort to drastic measures, such as tapping into bond proceeds, debt funds, or sinking funds to meet operating needs (which is illegal, prohibited, and carries significant penalties). Instead, Michigan law provides short-term borrowing options designed specifically to help schools bridge temporary cash flow gaps.

While bonds finance long-term capital improvements, like buildings or athletic facilities, cash flow borrowings are different. They are short-term and designed to cover temporary operating deficits. The primary tools available to schools are State Aid Notes (SANs) and Tax Anticipation Notes (TANs) which, instead of being repaid through a separate debt levy, pledge repayment from future receipts of state aid or tax revenues, respectively.

A Line of Credit (LOC) can also be a viable option, but the legal and procedural borrowing requirements are cumbersome. For example, (1) prior approval from the Michigan Department of Treasury (Treasury) is required before issuance even if your school already has qualified status, (2) a security report filing is required after issuance regardless of any draw, and (3) if the LOC is tax-exempt, an IRS filing is also required after each draw.

A SAN allows a school to borrow against its future state aid revenues. Under state law, a school is generally permitted to borrow up to 70% of allocated, unreceived, and unpledged state aid. The SAN must be repaid within 372 days. A SAN is typically purchased by a local bank through either a competitive or negotiated process. In most cases, a SAN can be issued within four to six weeks, though the timeline can be accelerated if needed.

Schools may also be familiar with the Michigan Finance Authority’s (MFA) SAN pooled borrowing program, which usually takes place in the summer. If a school borrowed through the MFA and needs a supplemental borrowing, then the school must obtain MFA’s prior written consent to issue another SAN. The MFA requires that its SAN take priority over any other SAN issued. That restriction may increase the interest rate on or even limit bidders for a supplemental borrowing.

An alternative and less common option for borrowing is a TAN. When state aid is in flux or if a school has already borrowed through the MFA, a TAN may be an attractive option, given that it allows a school to borrow against future expected tax revenues. Typically, a TAN may pledge either the current fiscal year’s tax collections or the next succeeding fiscal year’s tax collections. Repayment is often based on when the respective taxes are collected, and schools have a statutory obligation to set aside a portion of each dollar of tax collections until the amount set aside is sufficient to pay off the TAN. Like a SAN, TANs may be issued through a competitive or negotiated process, and the issuance process generally takes up to four to six weeks.