4.5 Cash Flow Borrowings
“Cash flow” is the movement of monies “in” (revenues) and “out” (expenditures) of a fund. Public agencies may find themselves temporarily short of cash to finance operations and may need to address the shortfall with a short term financing called a “cash flow borrowing.”
In general, proceeds of tax exempt bonds may not be used to finance working capital expenditures. Any cost that is not a capital expenditure is a working capital expenditure (e.g., current operating expenses). Proceeds of an issue of tax exempt bonds may, however, be allocated to working capital expenditures (and therefore be deemed spent for tax purposes) as of any date that the issuer’s working capital expenditures exceed its “available amounts.” Available amounts mean any amount that is available to an issuer for working capital purposes of the type being financed by the bond issue. Available amounts may include cash, investments, and other amounts held in accounts or otherwise by the issuer or a related party if those amounts may be used by the issuer for working capital expenditures of the type being financed by the issue without legislative or judicial action and without a legislative, judicial, or contractual requirement that those amounts be reimbursed. In general, an issuer will have no available amounts on a date on which it has a cash flow deficit.
Public agencies may generally issue tax and revenue anticipation notes (TRANs) or revenue anticipation notes (RANs) to finance working capital expenditures during periodic cash flow deficits. Deficits may result from a temporary mismatch of revenues and expenses within a fiscal period and the size of a TRAN or RAN borrowing is generally limited to the amount of the anticipated deficit over the course of the fiscal period. Issuers may keep any arbitrage earnings generated by the investment of the TRAN or RAN proceeds provided that the issue is sized so that all of the TRAN or RAN proceeds are reasonably expected to be expended on working capital expenditures within 13 months of the issue date. See Section 3.3.4, TRANs and RANs.
TRANs and RANs are generally short term cash flow borrowings. Long term working capital borrowings (long term bonds issued to finance cash flow borrowings or judgments) are more challenging to finance, but long term working capital financing may be available if the issuer’s general fund is expected to have a persistent cash flow deficit.