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Thursday, April 23, 2020

Where Can Local Governments Find Short-Term Cash Flow Relief During the COVID-19 Crisis?

Although the CARES Act provides federal aid to state and local governments, there is no direct allocation of money to local jurisdictions with a population less than 500,000. As a result, most local governments have to request an allocation from their state or county governments. At the time of this post, the rules describing how Illinois and the collar counties will distribute the federal aid have not been published. In the meantime, many local governments are forecasting significant revenue reductions, either because of tax reductions or delinquencies or sharp losses of user fees. For this reason, this post explores somem of the short term borrowing options for local governments, including non-home rule units.

To begin, it is important to recognize that the borrowing powers of local governments have not changed. Although the Governor has issued dozens of Executive Orders, he likely does not have the authority to suspend debt limitations or unilaterally change the borrowing powers of villages, park districts, libraries, townships, etc. Therefore, this post serves as a reminder of the borrowing power local governments have always had, but never knew they needed until now. As with any loan, local governments should consult with their local attorneys and/or bond counsel to ensure all the substantive and procedural requirements are satisfied.

Working Cash Fund – If the local agency has a working cash fund, it should work like a private revolving line of credit for the major operating funds. Once the working cash fund is raised through property taxes, the principal amount in the fund can be loaned to the fund which has a cash flow deficit in anticipation of property taxes collected for that fund. Once the property taxes are collected they should be used to repay the working cash fund. Any investment income earned on the working cash fund may be transferred to another fund, but if it is not transferred it becomes part of the principal amount of the fund available for loans.

Tax Anticipation Warrants (“TAWs”) – A TAW is another short-term loan that is designed only to manage cash flow issues. Like the working cash fund, it is not designed to increase the amount of money available for a particular purpose. Rather, it simply changes the cash flow for a particular fund while the agency waits for property tax revenues. With several counties debating whether to delay tax payment deadlines or waive interest and penalties, tax anticipation warrants could help a public body which needs cash because of the delay in tax remittances. TAWs may be issued in an amount not to exceed 85% of the Agency’s last known equalized assessed valuation (“EAV”) multiplied by the maximum permitted tax rate of the issuer for the particular fund against which the TAWs are issued.

Interfund Loans – Local governments may also borrow the unused fund balance in one fund to support the short-term cash flow needs of another fund. For municipalities, there is express authority for this in the Illinois Municipal Code. For other local governments, the Investment of Municipal Funds Act allows one fund to purchase the tax anticipation warrants sold by another fund. In both cases, the loan must be repaid within one year. The benefit of this type of loan is the speed with which it can be executed and the fact that no bank is needed.

Promissory Notes – Some local governments also have the authority to take out short-term loans. However, not all agencies can borrow money for the same length of time. There is no tax levy which secures the repayment of this debt. Nonetheless, the loan is a general obligation of the agency and must be paid from any lawfully available sources of revenue, including but not limited to ad valorem taxes, state aid, and the general fund of the governmental unit. Unlike the earlier short-term loans, a promissory note will increase the amount of money available to the agency rather than simply shift cash flow.

Home rule units of government will have additional options available through their home rule powers. Local governments should contact their local attorney to discuss these options and others for addressing short-term cash flow issues. If you need special counsel services, Ancel Glink is available to assist local governments.

Post Authored by Adam Simon, Ancel Glink


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