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Cash Flow Needs and Interim Financing: An Opportunity to Fill the Gaps

By Kristin Withrow posted 10-12-2023 02:52 PM

  

By Jennifer Bradlee, Best Best & Krieger LLP Of Counsel 

No public agency is exempt from the occasional need to manage cash flow issues, including special districts. With the recent California fires, continual water supply problems, looming capital project schedules, and even the mismatch in timing of expenditures and receipt of revenues, there are a host of reasons that may leave a special district in need of a way to temporarily fill the funding gap.

While long-term financing options, such as bonds and enterprise revenue financings, are typically in the forefront in the world of municipal finance, short-term interim financing plans can be overlooked, but often necessary. And most special districts have a variety of options for obtaining temporary funding for the agency in time of need.

IDENTIFY REVENUE NEEDS

It is important for special districts to take a holistic approach to their revenue and cash flow needs. Special districts should have a solid understanding of their sources and timing of revenue, not only for operations but for capital projects as well.

Capital Project Funding

There are a variety of ways in which a special district can finance capital projects, including general obligation bonds, certificates of participation, enterprise revenue bonds, federal loans, and other common long-term financing vehicles. But at times, the project schedule or initial project and planning needs get out ahead of the source of the financed proceeds. For example, even though a special district may have obtained voter authority to issue bonds for a capital project, the time between voter authorization and the actual issuance of bonds and receipt of proceeds can be years. In this instance, the planning and initial costs for such a project are likely to already be underway. While some special districts may be able to shoulder the costs until they are reimbursed with financed proceeds, many others cannot absorb a hit to their general and/or reserve funds, even if temporary. Additionally, some sources of financed moneys, including certain federal lending programs, require a special district to obtain interim financing prior to the receipt of the loaned proceeds. In these cases, special districts may be able to fill the gaps with a variety of interim financing vehicles.

Cash Flow Needs

In addition to capital projects, certain cash flow needs can leave a special district in need of interim funding. Special districts may experience a mismatch in the timing of the payment of expenditures and their receipt of revenues, including tax revenues. Other special districts may experience an unexpected increase in expenditures which can be caused by a variety of occurrences, including a heavy fire season or natural disaster, which depletes general fund or reserve moneys. In such cases, interim financing may not only be available, but may be the desired option, to cover a temporary need for operational moneys.

There are a variety of financing team members who assist special districts through the winding roads of municipal finance. And due to some of the complexities involved, it is important for special districts to reach out to team members early on in the process. From legal counsel to financial advisors, the earlier a special district reaches out, the easier the process becomes with more options available for consideration.

In order to even know where to start, a special district must first assess its financial needs and understand them. And while the process of obtaining interim financing may seem daunting, there are many team members available to special districts who are able to remove the burden and assist in problem solving. Because interim financing can become an important part of a capital project or operational plan for a special district, it is good to remember there is likely a way to fill the funding gaps.

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