Late payment penalty waivers for Indiana property taxes paid after the May 11, 2020 deadline are expected to result in a delay and reduction in property tax collections and a lower tax draw in June for local government entities. This will likely have a negative impact on cash flow for operations. Even more concerning is the effect the reduced property tax collections will have on debt that is paid primarily with property tax or tax increment financing revenue. In the longer term, as businesses close or limit their products and services, we could see a reduction in other revenue sources, such as local income tax, vehicle excise tax, casino revenue sharing, food and beverage tax, innkeeper’s tax and gas tax.

Unless local municipalities can draw from cash reserves or temporarily borrow from other funds, they may need to borrow externally to meet cash flow needs by using tax anticipation warrants. Utilizing a tax anticipation warrant (TAW) is a way to borrow against future property tax draws. A warrant is specific to a particular fund. Taxing units normally borrow against the collections from the general and debt service funds, but may also borrow against other property tax-supported funds. The principal and interest of the warrant are payable from the designated fund.

Generally, a warrant is limited to 80% of the certified or estimated semiannual property tax distribution, unless a state law indicates otherwise. The limitation is primarily to ensure that the warrant holder will be repaid if there are delinquencies. For example, if 80% of property taxes are collected, the warrant holder will be repaid in full. Receiving 80% of collections is a crucial concern in these challenging times, although, historically, it is rare for collections to be under 90%. 

The core credit analysis for a TAW typically includes current financial information, the assessed valuation of the taxing district, the percentage of property taxes collected in recent years and a list of the current largest property-owning taxpayers in the taxing district. Growth projections and fund balances are not relevant since the warrant is a first lien on the distribution of property taxes.

The credit rating agencies have addressed their views on short-term financings for cash flow disruptions caused by COVID-19. The agencies expect to deliver these issuances, as they are a key resource available to public entities in these times. However, an issuer can expect them to ask about what the entity’s overall plan is for addressing COVID-19-related impact. While they acknowledge short-term borrowing is a tool, they don’t expect it necessarily to be the first tool a local government uses.

Typically, a warrant must mature in the same year it was issued. However, some exceptions may apply. For example, if the property tax collection deadline is extended past Dec. 31, it will be necessary to issue warrants initially with a Dec. 31 maturity, and refund them later with a new maturity date.

If your government entity needs TAWs to fulfill financial obligations due to temporary cash flow shortages, contact your municipal advisor. A municipal advisor can help prepare monthly cash flow projections, term sheets to explain the loan terms and a bid form to send to potential purchasers, as well as help coordinate and host a competitive sale. The process can take as few as 30 days.

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

Paige E. Sansone
Partner, CPA
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