New York’s fiscal crisis could spur short-term borrowing by school districts if the state ­delays some of the $3.8 billion in aid payments due to districts in June.

“It could force a lot of local district borrowing if they don’t get their cash that month,” said John Shehadi, chief executive officer of financial adviser Fiscal Advisors & Marketing Inc. “The district crafts their budget with the total debt-service payment, and on the revenue side they estimate the state aid, and to the extent the cash doesn’t show up by June 15, the district’s still obligated to make the payment.”

In past years, the state has partially prepaid on March 31 a school aid payment that is statutorily due June 1. Because of New York’s fiscal mess, it did not make any prepayment this year. School districts had expected to receive $2.1 billion last month as a prepayment on $3.8 billion due on June 1. Skipping the prepayment bought the state some time, but has not solved the problem.

“Based on our current projections, we’ll be about $1 billion short of that amount on June 1 in terms of our cash flow,” said Division of Budget spokesman Matthew Anderson. “There are a range of options we’re considering — a form of short-term borrowing potentially, further payment delays. These are options that we have to consider as we head toward the June period when we face that cash crunch.”

The state has been operating under emergency spending bills after lawmakers missed the March 31 deadline to pass a fiscal 2011 budget.

Gov. David Paterson’s $135.28 billion budget proposal called for a $1.1 billion reduction in school aid for some 680 districts. The Assembly has sought to restore $600 million of those cuts.

The passage of a “timely and responsible budget” that provided savings to the state and an improvement of revenue would provide some relief, but the state would still face cash-flow difficulties in June, Anderson said.

In December, the state delayed a $582 million payment to school districts to deal with its cash-flow problems. That payment was eventually made. The delayed aid payments fund operating expenses, not building aid for capital programs. New York partially reimburses school districts for capital expenses according to a formula.

Districts still have to contribute a local match, which means that delays in operating aid could still have an impact on debt-service repayments.

Bond documents for school borrowing disclose that “we’re dependent on the state for aid and to the extent the state doesn’t pay, we could incur financial difficulties,” Shehadi said.

He has recommended to his school district clients that they have authorizations in place to do a short-term borrowing if the need arises in June.

According to a poll taken by the New York State School Boards Association earlier this month, 18% of school board members said they would borrow money to deal with the March delay. The association reported that 39% of school districts had insufficient reserves to cover the delayed payments.

NYSBA spokesman David Albert said most districts would likely dip into unrestricted reserves rather than borrow if there is another delay, but that still presents challenges to districts already facing budget cuts.

“What it’s going to mean is, districts will have far less in their rainy-day funds,” Albert said.

Operating budgets in most New York districts have to be finalized on May 4 and submitted to voters for approval on May 18. It’s possible that districts will not know what aid they will receive from the state for 2011, or the timing of that aid, before the May 4 deadline.

The delays do not directly affect districts’ future capital plans, which are approved by separate referenda, but schools could be wary of taking on larger projects in the current environment, Albert said.

The NYSBA is a party in a suit against the state over the December and March payment delays. That case, which claims the delays were unconstitutional, is expected to be heard in early June.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.