The most widely used form of short-term borrowing is the tax anticipation warrant (TAW). They are analogous to personal payday loans which individuals receive and must pay back from their next paychecks. As the name implies, a school board borrows money from a financial institution and agrees to pay back the loan with interest from taxes it anticipates receiving in the near future. In fact, by law TAWs must be paid back on a set date after the property tax receipts arrive. A school board may borrow up to 85% of the property taxes it has levied in the fund for which the warrant is issued but bonds must be repaid within 13 months (Braun, 2010).

The primary purpose of TAWs is for cash flow needs. Typically, a school district will sell tax anticipation warrants when it does not have sufficient funds available in its reserves to make payments due to employees or vendors. To some degree, TAWs are similar to credit card debt. If, for example, you need to repair your car and do not have money on hand but will soon, you may charge the repair on your credit card and pay it when the bill comes due.

Yet, similar to a person who has very little savings and has difficulty meeting unexpected expenditures, school districts that use TAWs tend to be the poorer districts with larger budget deficits and small reserves. TAWs also are an indication of financial weakness.

To illustrate this further, let’s consider a recent example of events which forced some school districts to sell TAWs. As the 2007-08 school year was fast approaching, the Illinois governor and legislature were unable to meet the regular deadline for a state budget. As the state budget process continued to unfold slowly into the fall, an extension of the 7% property assessment cap for Cook County became a sticking point in a struggle of wills between the governor and other legislative leaders. Without an agreement on the 7% cap, tax bills could not be issued to Cook County property owners and consequently, no property tax revenues could be collected for school districts. As the political wrangling continued, school districts were forced to dip into their reserves to pay salaries and other costs. For those school districts that had reserves, the primary negative effect was the loss of interest on the property taxes received late. For the least wealthy districts, they not only lost interest revenue but also had to borrow money through tax anticipation warrants then pay interest on the loans too! Again, the poorest districts were impacted the most.

In addition to TAWs, you should be aware that several other short-term borrowing options exist that employed less regularly than TAWs. Unless you are in business management, you do not need to understand the specific differences. However, you should at least recognize that other options are available. If you find yourself in a situation where additional financial counsel is needed, you would most likely seek advance from specialists. Other short-term options include:

Another potential source of revenues which school boards may to want consider is classified as long-term borrowing. Several distinct borrowing types are available to many school districts, each with its own unique requirements. However, before examining each of these individually, it is important to understand both the concept and legal requirements of school district debt service extension base (Illinois Department of Revenue, 2012). The extension is the amount of property taxes received the prior year.

Debt Service Extension Base

In Illinois school finance and politics, sometimes it is better to be lucky than good. So is the case with the debt extension limit. When the tax cap became law, a provision was included which established a permanent debt extension limit for school districts. The debt service extension base, which represented the existing school district debt, was based on the actual dollar amount of the tax extension in a school district's Bond and Interest Fund the year following passage of PTELL.

As you can imagine, the amount of the limit was extremely variant since it was not tied to the financial position of the district or any logical factors such as need, but merely the tax extension amount at a particular point in time. Those districts which happen to be lucky enough to have a large extension were winners while those which had no Bond and Interest levy that year were losers.

Let’s examine how the debt service extension base actually works. If your school district was fortunate enough to have outstanding non-referendum bonds with a repayment in 1994 of $2,000,000, you now have a permanent $2M debt service extension base. This means that you can tax property owners up to $2M each year to pay the principal and interest on outstanding bonds. In other words, the school district may sell bonds whose payment schedule equals $2M each year including principal and interest. What makes this a source of additional revenue is that you are able to tax the public in addition to the tax cap amount. If you were unfortunate and had no existing debt, the only way to sell bonds is to go to referendum. Beginning with the 2009 tax levy, school district debt service extension base will increase annually by the lesser of 5% or the CPI from the prior calendar year. This new provision is important for these school districts because school boards have the potential to generate additional revenues due to the increases in the amount of bonds they are permitted to repay. Since they can tax the property owners more, they can also increase the amount they borrow.

Bonds

What exactly is a bond? In its most basic form, a bond is a loan often in $5,000 amounts that the school district makes and agrees to pay back over some specified period of time much as you might an automobile loan. Bonds must be issued for a specific purpose. School boards, which meet specific legal requirements, have the authority to issue certain types of bonds.

For the purpose of illustration, we will assume that a school board has authority to sell $7,500,000 in bonds which will be repaid over four years. As such, the district will sell the bonds, generally to large financial institutions that either include them in investment portfolios or re-sell them to other investors. As a result of the sale, the school district receives $7.5M which is placed in the school district’s reserves and used as needed.

The bond holders are repaid their $7.5M plus interest over the term of the bonds i.e. the next four years. To make these re-payments, the school district is allowed to add the repayment cost to its Bond and Interest Fund levy annually but cannot receive revenue beyond the debt extension limit of $2M.

Bond Sale Process

What are the basic steps a school district takes to complete a working cash or funding bond sale? Although these can vary somewhat, Elizabeth Hennessy (2007), bond consultant for William Blair and Company, explains that a regular bond sale process normally includes:

You will note from the steps above that school administrators need to understand the general process but not be experts. Rather, they employ outside consultants and legal experts to facilitate their bond sales.

Now that we have discussed the debt extension limit, defined bonds, and examined the basic bond sale process, we are ready to consider five of the most common types of school district bonds: Working Cash, Life-safety, Funding, Alternate for One Cent Sales Tax, and Building Bonds.

Working Cash Bonds

A prominent type of bond is the Working Cash Bond. Proceeds from a Working Cash Bond sale are deposited in the Working Cash Fund. From there, they can be loaned or transferred as needed to other operating funds for use for capital projects or operations (Braun, 2010). If bond proceeds are loaned, they must be paid back to the Working Cash Fund when tax dollars are received.

Let’s consider some examples.

Working Cash Fund Bond Requirements

School districts are subject to certain requirements when they initiate a Working Cash Bond sale. First, if they want to sell the bonds as federal tax free, they must show that the funds are needed to operate the district in the immediate future. If not, the district is free to sell them as taxable bonds. Some investors are particularly interested in tax free bonds and are willing to buy them at a lower interest rate, which means that the school district will pay less interest on the bonds (Braun, 2010).

Another important fact is that Working Cash Bonds are subject to a "backdoor referendum." The term makes the sale sound “sneaky” but it is not. School districts which meet legal requirements to sell these bonds must pass a motion at an open school board meeting and publish a notice of intent to sell bonds in a local newspaper 30 days before any action. The school board then must hold a public hearing before the actual bond sale. During this time period, residents may force the school board to take the bond sale to a referendum if they can obtain the signatures of 10% of the registered voters on a petition which is submitted to the school board. The school board at this point may either hold a referendum or drop the sale. Absent the petition, the Board may proceed with the sale.

Life-Safety Bonds

Back in 1958, a horrible event occurred in the Chicago-area which led to the creation of the Life-Safety Code. This was the Our Lady of Angels fire which resulted in the deaths of many adults and children (Our Lady of Angels Fire Memorial, 2008). This event gave impetus to the State of Illinois Life-Safety Code which contains facility standards for public schools.

Every ten years, school districts are required to hire an architect who completes a life-safety audit of school district facilities. In this report, the architect identifies any areas which fail to meet life-safety requirements and therefore may qualify for funding either through life-safety bonds or the district’s life-safety levy. The architect must prepare special documents called Life-Safety Amendments which are submitted to the Illinois State Board of Education that makes the final determination on whether the project qualifies for life-safety (Braun, 2010).

For larger ISBE-approved amendments, school districts with debt servic extension bases may find that the bond sale approach is preferred. For example, a common Life-Safety improvement is the replacement of a school roof. Rather, than use funds from the Operations and Maintenance Fund, a school district with a debt service extension base may sell Life-Safety Bonds to pay for the repair.

Life-Safety Fund Requirements

The most significant difference between Life-Safety and Working Cash Bonds is that the district is not subject to the backdoor referendum process for the Life-Safety bonds. In fact, the school board can sell the bonds simply by taking action at an open school board meeting following a public hearing (Braun, 2008). However, remember that a district in a tax capped county without a debt extension limit cannot realistically use this bond sale option because they would have to repay the bonds from regular revenues creating a shortage of funds in other budgeted areas. Also, school districts must plan well in advance of any planned Life-Safety bond sale since approval by both the Regional Office of Education and the state can make the process quite time consuming.

Debt Certificates

School boards may issue debt certificates for capital projects. Debt certificates are paid from the general funds of the District. There is no separate bond or interest tax levy dedicated to the re-payment of debt certificates. The District annually budgets a sufficient amount to pay the principal and interest on debt certificates. These certificates are subject to the debt service extension base.

Debt certificates offer the advantage of spreading capital costs over several budget years. They also help preserve fund balances and may be a preferred alternative when interest rates are low. On the other hand, they are not an additional revenue source but do require the school district to pay interest (Hennessy, 2012).

Funding Bonds

Funding bonds, which are subject to the debt extension limit in tax capped counties, can be sold to pay for incurred district obligations (bills). Two common uses of these bonds include paying for computer hardware or buses already purchased by the school district. However, since they are subject to a backdoor referendum, you should be caution using them. If the taxpayer challenge is successful and the district does not pass a referendum, the district must still pay for these capital items. If you are considering funding bonds, it is advisable to consult a bond attorney to ensure you understand all bond sale requirements and any potential implications.

Non-Taxed Capped Counties

School districts in non-tax capped counties have a distinct advantage over those subject to PTELL. Since they are not subject to the tax cap, they generally can sell both Working Cash and Life-Safety Bonds because their debt repayment is not limited by the debt service extension base (Illinois Department of Revenue, 2012). The primary concern for these school districts is convincing their school boards to proceed with the bond sale and ensuring that any increase associated with the bond repayment does not create consternation among local taxpayers.

Alternate Bonds for One Cent Sales Tax

In counties where voters have approved through referendum a one cent sales tax for county school facilities, the school board may issue bonds to pay for improvements. Bond maturities may not exceed 40 years. These bonds are not subject to the debt service extension base or a backdoor referendum. However, a separate fund must be established to account for revenues and expenses.

Building Bonds

The final category of long-term borrowing we will consider is Building Bonds. These are the type of bonds with which you may be familiar because they require a referendum. When a school board wants to fund the construction of a major project such as a building addition or new school, it will often proceed with a referendum because it does not have sufficient reserves to fund the project.

A school board may hold a referendum during any general election except during fall elections during odd years. If the bond sale is approved by a majority of the voters, the district may proceed. Bond proceeds are used to complete the project and additional taxes are levied over a specified period of time to pay back the bond holders with interest. These bonds are not limited by the debt service extension base (Braun, 2010).

These bonds that are, in essence, tied to “brick and motor” are typically paid back over many years. Unlike Working Cash Bonds, which often fund operational costs, Building Bonds improve facilities for generations of students, some of whom may not yet be born. Consequently, it is common to extend debt repayment over many years to ensure that those who will benefit form the improvements share in the costs.

Other Available Bond Options

Although we examined the three most prevalent types of bonds: Working Cash, Life-Safety, and Building, other variations of bonds and short-term borrowing are available. According to Braun, (2010) two other rarely used bonds available include:

For all but school business officials, an extended discussion of these is unnecessary. Most school district administrators and school boards considering a bond sale will need to seek advice from bond consultants to identify and understand their options.

One other borrowing option for school districts is capital leasing (Braun, 2010). For school districts without sufficient reserves to purchase certain capital outlay items or which prefer to extend the payment of a large purchase over more than one year, this may be a viable alternative.

The most common uses of capital leasing are for school busses, copiers, and technology hardware. A school district will enter into a contract with a leasing agent to obtain the funds necessary to purchase needed capital items immediately. As part of the agreement, the district will pay back the loan with interest over several years. This option is especially helpful to financially needy school districts.

In this chapter, we examined the primary options for short and long-term borrowing. We discussed the debt service extension base, particularly as it relates to school bonds. We studied the five primary long-term bond types including their unique characteristics as well as capital leasing.