Volume I, No. 6

December 11, 2008

State Cash Flow Problem and School Facility Funding

The credit markets have frozen again.  This means the state has great difficulty selling bonds or issuing notes because there is no market.  This freezing is temporary (no more than four months) but is real in its effect on state funding for infrastructure including schools until the markets thaw.

While waiting for the credit markets to thaw, the state will hoard cash, much like an individual, in order to pay operational costs such as employee salaries.  One way to keep cash on hand is to delay funding new capital projects.

The State Allocation Board is continuing to make apportionments, but I believe the State Controller could delay making fund releases until the credit markets thaw.  If this happens, schools will have to act in the same way as in the past when the state ran out of bond funds.  School districts will need to do one or a combination of the following:

• Defer project contracts until there is a fund release
• Continue the project with local funds or local borrowing – if borrowing is possible
• Write project (or planning) contracts specifying that contractor (or architect or consultant) payment is contingent on receipt of state funds

I believe the current credit freeze will start to thaw after President-Elect Obama is inaugurated.  The current administration gave money to banks with the hope, but no requirement, that the money would be used for loans.  The current administration has protected mortgage instruments, credit cards and car loans, but not state and local bonds.  The result has been federal money improving bank balance sheets but no real new credit access for local businesses or state and local governments.  Local and regional banks that might have entered the gap have not had the credit for making such loans or the protection that the federal government would guarantee the loan, hence, the credit freeze.  I believe the next administration will change this direction and ensure federal funds increase credit availability, hence the thaw.

These changes, however, will take a month or more to take effect.  Consequently, the delay in school facility fund releases could last until February or March.

There is no reason to panic.  There is every reason to plan for a delay in fund releases.

~Dave Walrath

dwalrath@m-w-h.com