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Other Budget Issues

Last Updated: 4/26/2012
Budget Issue: Cash management options for charter schools
Program: Charter Schools
Finding or Recommendation: Recommend adopting Governor’s proposals to allow COEs to loan to charter schools and allow charter schools to issue tax and revenue anticipation notes. Recommend authorizing, but not requiring, loans from county treasurer to charter schools.
Further Detail


As with the state and other local agencies, school districts and charter schools sometimes face cash shortages because their expenditures must be paid before they receive revenues. To manage these cash shortages, school districts and charter schools commonly seek short-term loans to pay their financial obligations early in the fiscal year while awaiting revenues in later months. Short-term financing has been an ongoing concern for school districts that rely heavily on property tax revenues, given the first property tax payment of the fiscal year is not due until December. More recently, school districts and charter schools have increased their short-term borrowing in response to the various intra- and inter-year payment deferrals adopted by the state. School districts and charter schools currently receive $9.4 billion (roughly 20 percent of Proposition 98 funding) in late state payments (receiving cash in 2012-13 for costs incurred in 2011-12).

School Districts Have Three Primary Options for External Short-Term Borrowing. School districts with short-term cash flow needs have various external borrowing options. One option allows County Offices of Education (COEs) to lend to a school district if they have cash available. In addition, current law requires the county treasurer to loan to a district if it has insufficient funds to meet its financial obligations. The district must pay the loan back with the first new revenues received by the district, before any other payments are made. These two options are not used frequently by school districts, however, because COEs and county treasurers often have cash flow problems at the same time in the fiscal year as school districts. More commonly, districts borrow from the private sector, primarily by issuing tax and revenue anticipation notes(TRANs). The TRANs are purchased by investors and must be paid back by districts (with interest) within a short period of time, typically by the end of the fiscal year. The interest earned by investors through TRANs is tax-exempt, which allows the school district to pay relatively low interest rates. Most districts issue TRANs in a pool with other school districts to reduce issuance costs.

Charter Schools Have Fewer Options and Higher Costs. Charter schools have fewer and more expensive external borrowing options. Current law does not provide charter schools with access to loans from COEs or the county treasurer. Charter schools also do not have authority to issue TRANs. Sometimes the charter school’s authorizer will provide cash to the school or will issue TRANs that include cash to meet the charter school’s needs. If the authorizer does not provide cash, charter schools typically borrow from the private sector, using loans that are not tax-exempt. Because charters schools do not have access to tax-exempt loans from the private sector and typically are at higher risk of defaulting, they pay much higher interest rates than school districts to secure short-term loans.


Governor’s Proposal Gives Charter Schools Access to Options Available to Districts. The Governor’s proposal would give charter schools access to all external borrowing options currently available for school districts. To help meet short-term cash needs, the proposal would allow COEs to loan to charter schools, require county treasurers to loan to charter schools, and allow charter schools to issue TRANs.


Recommend Providing Charter Schools With Additional Borrowing Options. We recommend adopting the Governor’s proposals to allow COEs to loan to charter schools and allow charter schools to issue TRANs. These changes would provide charter schools with additional options for securing short-term loans. In addition, the changes could result in lower borrowing costs for charter schools because loans from COEs as well as tax-exempt TRANs typically carry lower interest rates than the loans charter schools obtain in the private market.

Recommend Authorizing, But Not Requiring, Loans From County Treasurer to Charter Schools. We have concerns, however, with the Governor’s proposal to require the county treasurer to loan to a charter school. Of greatest concern, the proposal would force counties to loan funds to a charter school even if the school was unlikely to repay the loan. We would recommend the Legislature modify the proposal to allow, but not require, the county treasurer to loan funds to a charter school located within the county. This would provide another borrowing option for charter schools but not require county treasurers to unwillingly enter into contracts with charter schools at a higher risk of defaulting.