Use of Bond Proceeds by a School District - Covering Short-Term (or Long-Term) Needs

December 22, 2014 by Enzo Incandela, Associate | James M. Snyder, Partner
Covering short-term (or long-term) needs.

School districts can issue bonds to fund working capital expenditures that arise from a variety of circumstances. Traditionally, working capital bonds have been issued as short-term obligations where the proceeds are used to cover a district’s temporary cash flow, or operating, deficit. Short-term budgetary deficits can arise from a mismatch between the receipt of annual revenues (property taxes or other) and the timing of annual expenditures of the issuer within a year. Tax anticipation warrants (“TAWs”) are often issued in anticipation of taxes levied but not yet collected. TAWs may be issued in an amount up to 85% of the total amount levied for the particular fund against which the TAWs are issued. Longer-term working capital bonds have become more commonplace in recent times due to financial difficulties stemming from the recent economic crisis, which caused significant declines in property values. School districts use these longer-term working capital bonds to address structural deficits that are not the result of a mismatch of revenues and expenses. Tax anticipation notes allow a school district flexibility to balance out its revenue collections from anticipated levies with anticipated expenditures. A school district is permitted to incur debt by issuing a tax anticipation note in an amount not exceeding 85% of the taxes levied for the particular fund against which the notes are issued. Further, a tax anticipation note is required to mature within two years and may not be issued if there is an unpaid note from any prior year. Although tax anticipation notes are generally a means of balancing a school districts operating expenses with revenue collections, these notes may sometimes be used as a bridge to fund a pending capital project while the school district structures more permanent funding by the end of the year. Insurance reserve bonds, funding bonds, tort judgment funding bonds, interfund loans, interfund transfers, state aid anticipation certificates and working cash fund bonds are permitted under Illinois law assuming certain requirements are satisfied. Certain federal income tax issues exist in connection with working capital financings.

View Full Site View Mobile Optimized