Agenda Item #12
Line of Credit (LOC) between the District and Wells Fargo Bank
In recent years, the District has entered into short-term financing arrangements known as Tax Anticipation Notes (TAN), which is a common practice among Florida School Districts. The TAN financings have occurred to fund anticipated cash flow deficits in the general fund during the early months of the fiscal year (July through October), prior to the collection of property tax revenues that occur beginning in late November. Historically, there has been a need to issue the TAN within a range of $15-$45 million during certain fiscal years to cover cash flow needs.
In our efforts to reduce overall district costs, the Finance Team is working with the Financial Advisor, RBC Capital Markets, for creative ways to meet cash flow needs through financing with a low-cost option, rather than a traditional TAN. During the current fiscal year, the District has an opportunity to work with our depository relationship bank, Wells Fargo, N.A., to create a minimal Line of Credit (LOC) from which we can draw down borrowed funds, should there be a cash flow need during the period between late October and late November.
The LOC allows the District to draw down only the specific amount of funds needed rather than the entire amount of the LOC and the interest rate is locked in only at the time of the drawdown. For example, if the LOC amount is $20 million and it is determined that only a $15 million drawdown is needed in mid-November, the District would only be required to draw $15 million to meet the cash flow requirements in mid-November. The payback period will be a maximum of 120 days but no later than January 31; however, an earlier date can be mutually agreed upon between Wells Fargo and the District, if desired. Under the traditional TAN financing, the District would borrow the funds, usually in October, and the entire amount of $20 million would be transferred to the District via a wire transfer, on the closing date, which is usually in late October. Under a TAN financing, the District would lock in the interest rate in early October and would be required to pay interest costs on the entire amount borrowed until the funds are paid back by the District, usually around 8 months later, just prior to the end of the fiscal year.
The Finance Team, along with the District's Financial Advisor, believe the LOC arrangement to be the lowest borrowing cost opportunity available to the District. The Financial Advisor and Wells Fargo Bank, N.A. have both expressed that Wells Fargo is providing the credit line option to the District because of our current customer/bank relationship and is not a typical financing arrangement that is offered as a general financing tool. The expected interest cost and cost of issuance for a credit line drawdown is expected to range between 0.5 and 1.0 percent based on current market conditions, and cost of issuance is expected to be approximately $50,000, which is much cheaper than traditional lines of credit.
Approve the delegation of the Superintendent to authorize the Financial Services team to move forward with an LOC agreement between the District and Wells Fargo Bank, N.A. to provide interim funding via a line of credit, should the cash flow need arise in the October-early November time frame just prior to receiving property tax revenues in late November.
Information - 7/22/2014
Consent after Information8/12/2014
Authority for Action
Involves Expenditure of Funds Directly in the Classroom
Source of Funding
Agenda Item will not Require the Expenditure of Funds
Jo Ann Clark, Director of Accounting Services, ext. 660
Judy Preston, Associate Superintendent of Financial Services, ext. 600