Volume I, No. 4

November 25, 2008

Will the State’s Cash Shortage Impact the Flow of State School Facility Bond Funds to School Districts from the State Allocation Board (SAB)?

In the Assembly Budget Committee Hearing on November 14, 2008, the State Department of Finance testified that the state’s cash cushion is falling, and the state could have difficulty selling Revenue Anticipation Notes (RAN’s), which the state typically uses to smooth out General Fund cash flow. We have heard false rumors that the state’s cash problems will result in the state defaulting on their General Obligation (GO) Bond debt service payments, or the cash flow problems might cause an interruption in the allocations to school districts from the SAB.

Neither of those rumors is accurate. GO bond debt service payments (along with a couple of minor education related programs) have first call on state general funds, and the negative consequences of defaulting on any state GO bond would be catastrophic to the state’s financial credibility.

Regarding the impact on SAB allocations, when the SAB authorizes allocations to school districts for projects funded from State School Building General Obligation Bonds, the State Treasurer's Office (STO) either sells bonds up to the limits authorized by the voters, or the SAB borrows from the Pooled Money Investment Account (PMIA) if the STO determines that current market conditions are not advantageous to the state to sell bonds. The PMIA currently has about $60 billion in state, special funds and local funds. While the state also can borrow from the PMIA to even out their general fund cash flow needs, it is highly unlikely that the PMIA would be depleted by the state’s current cash flow needs. First, the short-term cash needs are much lower than the $60 billion in the PMIA. Second, there are interest rate advantages to borrow externally using RAN’s, rather than to borrow internally from the PMIA. And third, state law requires that any money borrowed from the PMIA cannot interfere with the intended purposes of the funds in the PMIA, so if the SAB needed funds in the PMIA authorized by GO’s for school facilities, the funds in the PMIA for that purpose would have to be provided.  

We certainly are in unchartered waters with the State’s financial crisis, but the possibility of the State defaulting on GO bonds is “not an option”, and the short-term cash flow problems should not be the cause of an interruption in allocations from the SAB to school districts.

~Duwayne Brooks

dbrooks@m-w-h.com