3.3.4 TRANs and RANs
Public agencies use the proceeds of tax and revenue anticipation notes (TRANs) and revenue anticipation notes (RANs) to finance their current fiscal year expenses. Although the notes may mature in the following fiscal year, they are payable solely from revenue received or accrued during the fiscal year in which they are issued. TRANs and RANS are secured by a pledge of and lien on the revenues of the fiscal year of their issuance; should the revenues prove insufficient, however, the issuer is not obligated to pay debt service on the notes from any other source. TRANs and RANs are generally issued early in the issuer’s fiscal year.
PRINCIPAL USES – The proceeds of TRANs and RANs may be expended for any purpose for which the issuer may use and expend money, including for working capital. TRANs and RANs are used primarily as a cash management tool and are of particular value if the public agency’s revenues and/or expenditures are uneven over the course of a fiscal year, as is often the case for public agencies that derive revenues from property taxes.71 Expenses incurred early in the fiscal year can be paid from note proceeds, and revenues received later in the fiscal year can be used to pay the notes.
PRINCIPAL USERS – School districts and many general government agencies use TRANs and RANs.
LEGAL AUTHORITY – TRANs and RANs are generally issued under the provisions of California Government Code Sections 53850–53858. These provisions authorize notes to be issued in an amount up to 85% of the issuer’s estimated taxes to be collected, income, revenue, cash receipts, and other moneys available for making note payments. These provisions allow the notes to mature up to 15 months from the date of issuance (as long as they are payable solely from revenue received or accrued during the current fiscal year). TRANs and RANs issued under the California Government Code provisions satisfy the requirements of the Current Fiscal Year Exception to the constitutional debt limit. See Section 1.2.4.1, Current Fiscal Year Exception.
APPROVAL PROCESS – The issuer’s governing board generally approve TRANs and RANs by adopting a resolution. Notes of a school district or community college district that has not been accorded fiscal accountability status by the California Education Code may be issued in the name of the school district or community college district by the board of supervisors of the applicable county.
STRUCTURE AND DOCUMENTATION – TRANs and RANs may be issued as fixed rate or as variable rate obligations and may be made subject to optional prepayment, although they are generally issued as non callable, fixed rate debt. If the notes are issued with a term of 12 months or less, interest is generally paid at maturity; if the notes have a longer term, an interim interest payment date is generally established. To ensure that current fiscal year revenues needed to pay the notes remain unspent and available, the issuer is generally required to set aside revenues in specified amounts for payment of the notes during the second half of the fiscal year.
TRANs and RANs are generally issued under a note resolution adopted by the issuer. To enhance noteholder security, a trustee or fiscal agent may be engaged to receive and hold revenues set aside for note payment, in which case a trust agreement or similar agreement may also be required. To spread financing costs and enhance marketability, TRANs and RANs of multiple issuers are often combined in a pooled financing. See Section 3.7.7, Pool Bonds.
OTHER CONSIDERATIONS – Depending upon market conditions, it may be possible to invest the proceeds of a TRAN or RAN issue before expenditure, at yields higher than the yield on the notes. The extent to which TRANs and RANs can be issued on a tax exempt basis and the ability to retain “positive arbitrage” depend upon satisfaction of the requirements of the Internal Revenue Code of 1986, as amended, and applicable regulations. See Section 4.5, Cash Flow Borrowings.
POST-CLOSING ADMINISTRATION AND OVERSIGHT – The issuer must manage its annual cash flow to ensure that it will have revenues available to make required set asides for the payment of the notes at the times and in the amounts required and must, upon the turn of a fiscal year, separate required revenues of the prior fiscal year from revenues of the new fiscal year.