For cities and towns to operate efficiently, effectively and reliably, they must have sufficient funds to pay for their expenditures as they arise. Revenue inflow, however, is cyclical throughout the year, and many times does not match the timing of expenditures, creating a need for supplemental money to bridge temporary revenue shortages. This concept is known as positive cash flow.
The most common and easiest way to maintain positive cash flow is for city and town leaders to keep a balance of unassigned funds that they can use to bridge temporary current year revenue shortages. If a cash flow challenge arises, then council can advance funds from this unassigned fund balance to cover expenditures until the city receives current year revenues. They can then repay the fund balance. Having such funds available allows the municipality to avoid interest and legal costs associated with borrowing money.
Beyond bridging the revenue shortages they might know about ahead of time, cities might face other expensive emergencies, such as a natural disaster. As a result, those cities that make regular use of fund balance to help with cash flow should take care to maintain funding levels that would not only cover the anticipated expenses, but can also address unexpected costs as well.
Sometimes a municipality will lack the financial reserves to cover cash flow challenges. When this happens, they may think of a line of credit from a local bank to be a logical option to consider, but state law does not allow this under any circumstances.
Council must adopt these debt instruments by ordinance after two readings and should use a bond attorney to ensure compliance with the law.
Tax anticipation notes
Tax anticipation notes are the most common tool used by cities experiencing a cash shortage. Cities can issue these against anticipated property tax revenue, or business license tax revenue, and the amount borrowed does not count against the state-mandated debt cap of 8% of the municipality’s assessed value.
Once cities issue a tax anticipation note, they must pay the amount back within 90 days of the due date of the revenues that are collected. For example, a city could issue a tax anticipation note against property taxes that are due on January 15. The city would then have to pay back the amount no later than April 15. There is no provision in state law to extend a tax anticipation note’s due date beyond the 90-day deadline.
Bond anticipation notes and grant anticipation notes
Bond anticipation notes can allow a city to start a project that will be funded by yet-to-be-issued bonds, while grant anticipation notes fulfill the same function for forthcoming grants. As with tax anticipation notes, cities must repay these within a specific period after receiving the bond or grant funding.