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No one needs to be reminded that there is a current economic upheaval taking place. As communities everywhere try to assess the impact and perform sensitivity analyses to determine if and when they will face liquidity issues, it is helpful to understand the options available.

Where to start

As this is being written, our municipal advisors are in the process of reviewing the Request for Comment just released by Moody’s Investors Service on its update on proposed methodology for short-term debt of U.S. states, municipalities and non-for-profits (subscription required). Among other things, Moody’s will be eliminating scorecards for bond anticipation notes and short-term cash flow notes, and instead, will map the short-term ratings to the issuer’s long-term rating. What this suggests is what we all know: short-term cash flow borrowing or other financial remedies should walk hand-in-hand with a long-term assessment of financial health and economic viability. 

What tools can help?

Understanding what drives your need is paramount to knowing what tool(s) you might use to relieve cash flow pressure. Below is a listing of some of the tools that might prove useful as you assess your options:

  • Liquidation of investments: It is tough to let go of well-placed investments. At times, entities perceive a difference between “cash” and “available funds.”  If this applies to you, weigh the pros and cons of early liquidation against other alternatives.
  • Use of reserves: Many reserve policies include amounts earmarked for emergencies. Cash will continue to be king and spending down all your reserves may not be the right answer. A well thought out cash flow projection will help with the decision, including how much to draw down from reserves.
  • “Spot refunding”: Refinancing existing debt can be used to generate savings but can also be done to restructure debt and relieve cash flow pressures. This is not an all-or-none proposition and should be done strategically to give your entity cash flow relief short-term so you can make budget changes or other adjustments leading to a permanent fix. As an example, refund the next one or two years of principal to get immediate cash flow relief. The principal you removed can be phased in over time or more significantly delayed. This will give you room to breathe and provide time to get a longer-term plan in place while avoiding a more costly full issue refund.
  • Use of new external resources: The federal and state governments are searching for ways to assist communities and businesses. Federal stimulus money for states and local municipalities is starting to emerge. If your community doesn’t have staff available to research and track potential federal and state resources, stay in touch with those that do, like your professional associations and advisory professionals that you work with.
  • Conversion of pay-as-you-go financing to debt financing: If your budget includes cash funding for capital needs, switching to debt is a way to retrieve cash already expected to be available. You can repay the borrowed funds in smaller amounts over a longer time period. Alternatively, if your expected recovery period allows you to shorten the term, it will help control the interest costs involved in the borrowing. While not always endorsed as a best practice, Minnesota municipalities (including school districts) can also issue bonds to fund liabilities for either OPEB or pension liabilities.
  • Use of borrowing: The ability to borrow will vary depending on state and local financing authorities. Whether a borrowing is taxable or tax-exempt will be determined under federal rules, but don’t let taxability dissuade you from considering this option. As mentioned above, switching from cash to debt for capital needs is one way to recapture cash.  Applicable statutes are varied for this option. In Minnesota, there are also short-term borrowing options that could be available to you, such as the two listed below, but we recommend seeking financial and legal advice to address your specific situation.

1) Certificates of Indebtedness – These are permitted for cities, counties and towns to respond to natural disasters or other public emergencies requiring extraordinary expenditures and must mature in three years. A second statutory authority allows borrowing for up to two years for any reduction in revenues below what was budgeted at the time when property taxes were certified. The reduction can be due to lower taxes, aids, state reimbursement payments or any other source. “Any other source” may provide relief in the case of sales tax collections or other volatile sources. In both cases, the debt is not included in net debt calculations.

2) Tax or aid anticipation certificates – Many types of jurisdictions, including school districts, can borrow in advance of collections. Specific limits related to timing, amount and term often apply. 

  • Fee increases: Given your circumstances, this option may be at the bottom of your list. However, it is possible, and perhaps favorable, to other options in rare cases.

The needs of every community are unique and no one remedy will fit all, but there are tools and resources that can be used alone or together to craft a solution that fits your government’s needs.

For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.

Doug Green
Government building doors
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