Borrowing To Meet Payroll: No More

Borrowing To Meet Payroll: No More

By Alex Saitta

January 1, 2012

Introduction:

During last year’s budget debate I never lost sight of one fundamental fact of finance — if an organization has to borrow to meet payroll that organization has a cash flow problem, which is a symptom of a weak financial condition, and the organization will find itself in critical condition if more financial woes happen to strike.

During October and November of 2010, the Pickens County School District had to borrow $4 million in order to keep its general fund account or the district’s checking account from becoming overdrawn.

Get Off The Ropes!

The district had to pay interest on that loan, which was money out the window that couldn’t be used to buy even one pencil. Not only that, when an organization is on the financial ropes, if something else goes wrong financially, that organization could be knocked on its back.

Like in boxing, one aim in money management is to stay off the financial ropes and work in a safer area or the center of the financial ring. The majority of the board worked to improve the district’s financial situation so it could withstand another financial blow if one were to occur plus the district is slowly restoring some of the cuts made the past few years.

Improving The Cash Position:

Here are some steps there were taken to get the district out of the cash strapped position it was in.

* General fund spending was cut by about $2 million in 2011-12. That is, the withdrawals from the district’s checking account are $2 million less than last year. Like with your checking account, if you are spending less, the lower the probably you’ll overdraw on your account.

* School properties are being sold (not given away), the sales are being closed, and that cash is being deposited in the district’s checking account.

* In the 2010-11 the district (Superintendent, principals, department heads, and employees) spent $2.2 million less than revenue. Despite one attempt to spend most of that $2.2 million and another attempt to spend more than that, neither occurred. Only about $600,000 of that money was spent.

* The ending of federal stimulus funds resulted in this year’s budget deficit, which triggered the $2 million spending cut. Often the Federal Government gives the district promised money late in the year and sometimes one or two of the checks don’t arrive until the following year. The silver lining of no longer receiving stimulus money is we no longer have to experience that Federal Government non-sense of spending the money first and getting the check later that crimps our cash flow later in the year.

Looking ahead…

Anticipating a possible mid-year cut in state revenues, in 2011-12 the board/ district budgeted to spend less than budgeted revenue. The economy is growing, so mid-year state cuts are unlikely. This should add some savings to the district’s checking account that we hope to book on June 30, 2012.

The board voted down an extension of the 15 year TIF with Central. When that TIF expires next year, this will add another $155,000 annually to district revenues.

The Benefits Of Sound Financial Management:

These six items have and continue to combine to sure up the district’s cash position. It is safe to say the district has passed through its most cash stretched period of the year, and it did not have to borrow money. Truly, the district now has some long-term savings in its general fund account.

A benefit of not having to borrow to meet payroll is the district didn’t throw an interest payment out the window.

Another benefit is if a financial emergency hits the district (e.g., medical costs rise more than expected or the middle east explodes and oile sky-rockets to $150), we’ll have some long-term savings on hand to address the need.

Depending on how big the savings level is, some or most can be used to restore cuts that have been made the last few years. This is occurring and has been for months now. The budget was passed in May and implemented on July 1. I don't think a month has passed since then where the board didn't vote to spend additional money above and beyond the July 1 budget. In sum, the district is spending some and saving some. Additional spending has been allocated to adding 8.5 teaching positions, adding instructional supplies, art & PE supplies at Chastain Road School, adding six 4k classes, new bus radios that burned up in the fire and other needs.

The primary benefit is, I think the 3 year streak of reductions in force or position eliminations is ending.

What It Doesn’t Mean:

None of this means the district is on the verge of a financial victory or a knockout. We still have a fight on our hands with this ailing economy and rising costs like medical insurance for employees. For instance, the district’s medical insurance bill rises $1 million a year on average. Retirement contributions are rising $600,000 a year on average. The district has to pay those expenses and frankly doesn't have additional revenue to cover them. The district has added 600,000 sqf of space, and has yet to any custodians, repair personnel or lawn maintenance help.

The district will have to come up with that money or make cuts elsewhere in the budget. Like I said, the district is still in a fight.

Nor does it mean every dime of in the district checking account can be spent either. For instance, at the end of the month, when all my bills have been paid and before my start of the month check comes in from my investments, I typically have $2,000 in my checking account. That’s long-term savings in that account. Does that mean I can go out and spend $2,000 on windows for my house? No. If I do, and get hit with an unexpected bill, I’ll have to borrow to cover the expense. In sum, you don’t want to spend all of your long-term savings that is sitting in your checking account. Having a cushion is wise financial management.