COVID-19 has left many New York municipalities short on cash as they grapple with a triple threat: falling sales tax revenues, holds on state aid, and unexpected expenses due to the pandemic. Short-term borrowing strategies can provide local governments with the funds to stay afloat until property tax payments or other revenues arrive to replenish the coffers.

There are two main reasons a municipal government might issue short-term debt: because of revenue shortfalls, or because there has been an unforeseen expense. During the pandemic, many municipalities have seen both. Despite taking other budget-reduction steps, such as curbing spending, offering retirement or separation incentives, or cutting staff, some governments are still facing shortfalls of tax or fee revenues.

“After exhausting other available options, governing boards may need to consider issuing some form of short-term debt in order to generate sufficient cash flow to meet the operational needs for the remainder of the year,” reads a section in The Office of the State Comptroller’s Financial Toolkit for Local Officials in 2020 and Beyond, which recommends consulting with financial and legal professionals for guidance.

The main avenues for short-term debt issuance to address those issues are tax anticipation notes, revenue anticipation notes and budget notes. In dire cases, a municipality may also use deficit financing, also known as a deficiency note.

Tax anticipation notes, known as TANs, are borrowed in anticipation of the collection of the next year’s property taxes, which are generally due in January for counties, cities and towns; or against assessments. Generally, the OSC says, the funds from TANs may only be used for the purposes for which the tax or assessment funds they’re borrowed against would be used.

Revenue anticipation notes, or RANs, are borrowed to generate cash flow in expectation of receiving certain specific revenue types, such as sales tax payments or a particular grant. RAN proceeds may be used to meet expenses payable from the revenues they are borrowed against, according to the OSC.

Budget notes are generally used to finance an unanticipated expenditure, particularly if the municipality was already experiencing a bad year. Budget notes may be used for “any object or purpose for which a local government is authorized to expend money” according to the OSC, and they provide cash that can be used to finance increased appropriations. Budget notes must be used for the purpose specified by the municipality.

The timing on a budget note affects when it must be paid: Adopt and issue the note before adopting the next year’s budget, and the municipality must pay it next year; issuing a budget note after the budget is adopted buys an additional year.

To pursue a TAN, RAN or budget note, a municipality would solicit rates from banks, much as it would when issuing a bond anticipation note for a capital project. The governing body must authorize issuance of the debt, and the bond or debt resolution must include the interest rate, due date, and other details.

The fourth option, deficit financing, is a last resort when there is a deficiency of funds due to lower-than-anticipated revenues for that year’s budget. Local Finance Law imposes strict requirements on the form of the resolution that a local municipality or school district must adopt to issue a deficiency note. If a renewal is required or if the unit of government must issue another deficiency note the next year, state law triggers monitoring by the Office of the State Comptroller and requirements to file regular reports.

Many municipal governments in New York have found themselves in tight budgetary times due to the strains of the COVID-19 pandemic and shutdown, but careful and creative issuance of short-term debt can help them weather the crisis in a fiscally responsible manner.

As New York local governments cast about for strategies to manage funds and generate revenue to weather the economic hardships of the COVID-19 pandemic, some could benefit from a little-known provision of New York law that allows municipalities to borrow from one another.

Because municipalities in different parts of the state or the region may be experiencing widely varied effects of the virus and shutdown, this somewhat esoteric strategy presents another option in the face of state holdbacks of aid to cities, towns, villages and school districts. When properly executed, the lender and the borrower may get better-than-market-rate returns and terms.

Because local government must keep taxpayer funds safe and liquid so they may be used for public benefit, municipalities are limited in the types of investments they may make. These include time or deposit accounts in banks or trust companies located in New York and authorized to do business in the state; certificate of deposit accounts issued by those banks; and obligations such as bonds, notes or other forms of indebtedness issued by certain entities, according to the Office of the State Comptroller. Obligations of U.S. and New York State governments, and “in certain cases, New York State local governments are permissible investments,” according to the OSC’s Local Government Management Guide for Investing and Protecting Public Funds.

According to New York’s Local Finance Law, “Bond anticipation notes may be issued by any municipality, school district or district corporation in anticipation of the sale of bonds. Such notes may be issued whenever bonds have been authorized and the proceeds of such notes shall be expended only for the same object or purpose, or class thereof for which the proceeds of such bonds may be expended.”

The strategy involves short-term debt obligations, most commonly bond anticipation notes. Bond anticipation notes are often used as temporary funding to initiate large capital projects. Once those projects have begun, the municipality will typically issue serial bonds to fund the project over a period of 20 to 30 years. Bond anticipation note terms can be extended beyond one year within the restrictions of Local Finance Law and are generally limited to a maximum of five years.

How does a municipality go about starting the process?

One way would be to solicit a request for proposal (“RFP”). For example, if a town in Orange County finds itself with excess cash, it could circulate an RFP to other municipalities that are looking to borrow, letting them know the original town will offer terms better than market rate for the investment. Generally, this would be done through bond anticipation notes, with one-year maturity and a fixed rate.

The borrowing municipality would get the better rate as well as fewer fees, while the lender also gets a better rate of return than it might have gotten in the marketplace.

Of course, it behooves the borrowing municipality to make sure it is comfortable with the lending government, and the transactions must be approved by the respective boards. The lending municipality must also determine that it has plenty of excess cash available during the entire loan period, and therefore plenty of money to lend.

This little-known practice of municipalities borrowing from other municipalities can provide solutions and benefits for both sides of the equation while allowing local governments to exercise prudent and responsible stewardship of taxpayer funds.

As towns, villages, cities, and counties in New York deal with the economic fallout of COVID-19 in their own finances and on those of their taxpayers, it is a good time to consider an independent budget review to ensure that elected officials are doing all they can do to manage governmental funds properly.

Counties generally have budget departments, and often use independent reviews as a matter of course. In smaller municipalities, a municipal accountant or budget officer will generally ask department heads to submit budget requests, and then review those requests with them. The budget officer and the municipality’s chief fiscal officer must work together to create a realistic budget for the municipality’s governing board. This is intensive work in good times, and the pandemic has tightened finances across the board, creating new stresses and concerns.

New York State has projected an overall decline in sale tax revenues of 15 percent for April 2020 through March 2021, according to the State Comptroller’s Office. Some local municipalities will be hit even harder, especially with falling revenue from gasoline taxes due to lower prices at the pump. The New York Association of Counties has estimated that New York’s counties will see 22 percent drop in sales tax collections for the full year, a shortfall of $1.09 billion.

The Government Finance Officers Association notes that, particularly in difficult financial times, bringing in someone with technical expertise to review the municipality’s finances can provide reassurance to taxpayers that officials are acting responsibly.

An outside accountant can analyze the municipality’s operating results year-to-date, provide a clear-eyed perspective, and mediate the sorts of disagreements that inevitably arise among officials during budget negotiations.

At the same time, the reviewer can report any, identified deficiencies and inaccuracies in the municipality’s processes noted during his or her analysis and suggest solutions.

The independent accountant can review the budgeting practices of each department, and the assumptions on which planning is based. From there, the accountant can look at their projections of estimated revenues and appropriations and determine if they are reasonable.

For instance, town highway superintendents, who draw up their own budgets that require town board approval, may have disagreements with the town supervisor, and a neutral arbiter can help resolve the tension between what is needed to maintain roads and what the town taxpayers will bear overall.

In examining the overall budget process, the reviewer can look at the capital plan, and what expenditures are planned for the coming year or so; and the reviewer can look at debt projections. He or she can assess the fund balance plan and provide advice to officials on what they should use from those reserves

During the budget review process, the independent reviewer will meet with the members of the governing body to present comments, recommendations and findings and answer the officials’ questions. At the end of the process, the municipality receives a formal report.

An independent budget review can provide local government officials with assurances that they have done everything properly and responsibly for the taxpayers. The independent review also provides value and confidence for taxpayers, as they know someone with expertise in government accounting has provided input, and that there is a reasonable basis upon which their property taxes are determined.

Municipal governments in New York looking for ways to generate revenue can consider improvement districts, such as business improvement districts, to fund needed services in high-demand areas without imposing an undue burden on other taxpayers.

New York State enacted legislation allowing for the creation of business improvement districts (“BIDs”) in 1981. In general, improvement districts are created to provide services to a specified area, while having the property owners within that area who would benefit from those services pay for them.

BIDs are formed and governed by municipal officials and community members and funded through an added tax on commercial property owners within the borders. In exchange for those taxes, these BIDs offer services including street and sidewalk clean-up and maintenance, with the aid of volunteers; marketing of the district, and special events that draw in potential customers and contribute to the life of the district and surrounding community.

BIDs may also drive revitalization efforts with the municipality, bringing to fruition improvements to sidewalks, roadways, lighting, and other downtown design elements.

In practice, business improvement districts can be narrowly tailored for a specific service, or a broader entity that oversees security, sanitation, land- and streetscaping and marketing for business.

Examples of expansive business improvement districts are found in the City of Middletown, where the Downtown Middletown Business Improvement District encompasses the heart of the commercial district near City Hall; and in the Town of Poughkeepsie, where the Arlington Business Improvement District centers on Raymond Avenue and borders on Vassar College.

An example of a more focused BID is one created by the Town of Woodbury for the Woodbury Common Premium Outlets, the 250-plus-store shopping center that draws 13 million visitors annually from around the globe. The Woodbury BID was created specifically to fund police services required by the outlets.

The Town of Woodbury, with an estimated 2019 population of 11,370, employs 21 full-time and two part-time police officers, and four full-time civilian dispatchers.  Although the town has little other crime of any significance, according to statistics from the town and from the state Division of Criminal Justice Services, the department handles hundreds of larceny cases and more than 1,500 motor vehicle accidents annually.

Creating a business improvement district requires a public hearing. The district must be clearly defined, and its enhanced services will be funded via a special assessment on each property within its boundaries. Because the districts have higher demands for the services, the tax is essentially a premium

Although the BID will be incorporated as a non-profit, the assessment will be levied by the municipality along with property taxes, and the taxing district remains under the control of the local government. According to the Government Finance Officers Association, this has the added benefit of maintaining accountability to the public for the improvement district’s spending.

Some BIDs, including Middletown and Arlington were formed in part to revive urban downtowns that suffered in previous decades when malls and chain stores drew customers out of traditional shopping districts.

In areas where there may be separate special districts for water, sewer, lighting etc., a BID can also consolidate these other entities and simplify the structure of government. In cases of municipal mergers, BIDs can also play a role. For example, when towns and villages discuss mergers, concerns by village residents about reductions in services often present a stumbling block. In such a case, the solution could be a business improvement district that follows the village outline. That would allow a special assessment for dedicated police coverage for the former village, and the town could take over water and sewer as special districts.

Local governments need revenues to provide enhanced services to support the economic health and stability of commercial areas. Business improvement districts present a way to do that by charging a special assessment to the commercial properties that will directly benefit from those services, without unfairly burdening other taxpayers.

The COVID-19 pandemic and the accompanying shutdown have brought financial challenges to municipal governments throughout New York State.

Sales tax revenues declined steeply across the state in April and May compared to 2019, and state aid will be cut or delayed. Unemployment rates may affect residents’ ability to pay property taxes, creating further worries about revenue as we head toward the fall budget season.

There are strategies that county, city, town and village governments can undertake to mitigate the effects of the crisis: finding alternate ways to generate revenue and to cut costs to address short-term needs in the next 12 to 18 months; and making the budgeting process and financial practices more resilient to address long-term goals for the next three to five years.

The starting point can be a two-part analysis: First, a short-term analysis of cash flow to ensure the municipality can keep running in the next few months. Then a long-term forecast can determine if an economic upturn will resolve issues, or if there are deeper problems that need repair.

The COVID-19 pandemic has caused immediate fiscal pain around the state.

A survey by the Association of Towns of the State of New York (AOT) found that in the month of March, towns in New York lost roughly $215 million in revenue between drops in sales tax, mortgage recording taxes, license and permit fees and justice court fines. AOT noted in its survey findings that businesses in the state were operating as normal for the first half of March. Sales tax made up the largest portion of the loss, according AOT.

The New York State Comptroller’s Office has reported that April sales tax revenues in New York’s counties and cities dropped by 24.4 percent compared to April 2019. May’s sales tax collections fell 32.2 percent compared to May 2019.

State tax receipts for May fell by 19.7 percent compared to May 2019, a drop of $766.9 million, the Comptroller reported. Personal income tax withholding revenues dropped 9 percent in May compared to May 2019.

In bad times, the Government Finance Officers Association recommends taking a financial diagnostic review of operations and the budgeting process to provide officials of a financially distressed municipality with an in-depth look at their budgeting and fiscal practices. This helps to assess financial health and to identify areas for strategic cost savings and alternative sources of revenues.

In such a climate, it is crucial that local governments find a way to create what the GFOA calls “culture of frugality,” and find responsible, cost-effective solutions

Short-term measures, meant to affect 12 to 18 months out, are cost-cutting and alternate-revenue strategies, such as dipping into reserves to bridge a budget gap. With each measure, a government must consider whether the move will be a sound long-term strategy, or if a cut today could lead to increased costs down the line.

A number of school districts in the mid Hudson region used a variety of these tactics to get through the 2020-2021 school budget season, avoiding deeper cuts to teaching staff or academic programs by leaving jobs unfilled after employee retirements, and using fund balance to offset tax levy increases to spare taxpayers and keep the budget under the statutory tax cap.

Longer-term planning for recovery after crisis requires a data-based approach that addresses root causes of financial stress. This means requires studying the economic and social environment of a municipality, analyzing budgeting processes and reforms, and creating an operational plan.

Now is the time for government leaders to look for ways to mitigate the crisis, to build resilience through 2020 and beyond.

Over the next several articles, we will discuss these approaches in more depth, with recommendations for concrete steps that local governments can take.

Developing and implementing sound municipal fund balance policy is crucial to any local government’s ability to plan for the ebb and flow of expenditures and revenue and to deal with unexpected events or expenses, even in the best of times.

A policy that sets out the amount of funds a municipality keeps in reserve, how those funds may be used, and how they will be replenished is a planning tool, helping to guide daily operations as well as longer-term strategies.

There are five categories of fund balance. In order of most restricted to least restricted in terms of use, they are non-spendable, restricted, committed, assigned and unassigned fund balance. The latter three categories comprise what is known as unrestricted fund balance according to Office of the State Comptroller guidance. Under New York State law, counties, villages, towns and fire districts may carry over “a reasonable amount” of unappropriated, unreserved fund balance from one budget year to the next. A municipality must follow proper procedures and legal requirements to transfer funds between these classifications.

Municipal revenues ebb and flow as a matter of course. In Orange and Dutchess counties, for example, most municipalities collect their property taxes, the main source of revenue, early in the calendar year. Sales tax and state aid supplement are other major sources of funds. However, the government body must have enough cash on hand to cover payroll and bills throughout the year, even in the months when revenues are not coming in. That requires a cash flow plan for the entire upcoming year.

Since property taxes are not received at the very beginning of the year, the cash flow plan should contain a provision to cover this temporary shortfall. The standard, according to the New York State Governmental Finance Officers Association, is to maintain enough unrestricted fund balance in the general fund to cover at least two to three months of regular general fund operating revenues or regular general fund operating expenditures.

In addition, government officials should assess their municipality’s unique circumstances and risks to determine what level is appropriate for a sound fund balance policy. If a town or village is vulnerable to natural disaster such as flooding which could generate unexpected expenses, or to an unpredictable revenue source such as state aid that could be cut, officials may need to keep higher levels of unrestricted fund balance in reserve.

A sound fund balance policy provides a framework to guide current budgetary decisions as well as those for the long-term. For example, a municipality’s capital plan should inform officials and taxpayers what needs to be done over the next five years, and how it will be funded. Planning major expenditures in advance allows a government to save funds, minimizing the need to borrow.

Fire districts often set up equipment or building reserves and budget transfers to those reserves each year, to allow them to save for capital purchases such as fire trucks, which can cost from $600,000 for a new engine to $1.2 million for a new aerial ladder truck.

There are consequences to insufficient fund balance. When a municipality with limited reserves finds itself in the throes of an emergency, officials may have to make painful budget cuts that deprive residents of needed services, or they may have to raise property taxes. A municipality may have to undertake short-term borrowings, which can raise costs and hurt its bond rating.

If a municipality carries too much fund balance, it runs the risk of angering taxpayers, who will perceive this as paying extra taxes now to benefit the future.

So what makes good fund balance policy?

According to the New York State Comptroller’s Office, an effective policy is written, formally adopted by the governing body with input from relevant officials, such as the municipality’s financial officer. The policy should be used to develop long-term plans, and should address how surplus balances should be used, as well as how and when to replenish fund balance that has been spent.

A sound fund balance policy provides a cushion against unexpected expenditures and revenue shortfalls, and ensures that government operations can continue even in difficult times.

Contact RBT CPAs, LLP with any questions you may have.