Minnesota schools feeling extra pinch, will do more borrowing

More school districts are borrowing more money this year -- sometimes dramatically more -- to make ends meet.

To make their interest payments, some districts say they will have to dip into reserve funds -- leaving less cash to meet future rainy-day needs -- or divert budget dollars normally used to pay for things such as teacher salaries and supplies.

The borrowing spike results from the state's effort to balance the budget by holding back some of the funding it owes schools. This year and next, the state will delay paying schools 27 percent of what they are owed until the following year. The funding shift was one of several actions taken by Gov. Tim Pawlenty to erase the state's deficit for the current two-year budget period.

Though the money held back in such a shift will likely be paid eventually, the current shortages are leaving many districts strapped when it comes to day-to-day expenses, so they turn to lenders.

It's not uncommon for cash-strapped districts to borrow money. Also, lesser funding shifts have been made during previous years. Early reports, though, suggest that a level of borrowing is occurring that has not been seen in some districts for many years, if at all.

Statewide, the borrowing picture remains somewhat cloudy. Many districts haven't yet determined how much they will have to borrow or whether they will need to borrow at all.

But some see difficulties ahead. For instance, Michelle Vargas, the Anoka-Hennepin schools chief financial officer, said that the district might have to borrow more than $20 million in 2010.

Already borrowing more

In Brooklyn Center, school officials are borrowing $8 million -- $2 million more than last year, district superintendent Keith Lester said. Based on an interest rate of slightly more than 3 percent, that translates to almost $250,000 a year in interest payments. Lester noted that an average beginning teacher costs the district $46,000 a year, or about one-fifth of that total.

"Times are tough for everybody," Lester said. "The shift is going to help state government pay its bills, but it's going to take its toll on schools, because we have less money for educating kids."

"While some districts will need to make financial adjustments, it's important to recognize that Minnesota families and businesses have also had to adjust spending priorities and use techniques to get through these challenging economic times," Pawlenty spokesman Brian McClung said. He noted that the governor had proposed education funding increases at the beginning of the legislative session. The final result of the session was a two-year freeze on K-12 spending.

No one has a good fix on how many districts will take out short-term loans, except to say that it probably will be a lot more than in the past. Charlie Kyte, executive director of the Minnesota Association of School Administrators, estimates that 100 Minnesota districts -- between one-third and one-quarter of the total -- borrow money for daily expenses annually. Kyte figures that, over the next two years, schools will need to borrow hundreds of millions of dollars.

DeeDee Kahring, vice president and client representative with the St. Paul-based financial advisory firm Springsted, said 65 districts are borrowing for their short-term cash needs through her company, compared with 42 last year. The amount being borrowed has soared from $52 million to more than $120 million.

"We are seeing a lot more borrowing," said Joel Sutter, executive vice president of one of Springsted's competitors, Roseville-based Ehlers & Associates.

What has helped many districts is that they've been conscientious about squirreling away reserve funds for emergencies. Rosemount-Apple Valley-Eagan school officials, for instance, figure that they can handle the funding delays by taking money out of their reserve fund and without having to borrow. The Forest Lake district, which is borrowing $7.9 million this year, can cover the interest loan payments by drawing from its reserve "so it won't have a specific impact on our budget for the school year," district spokesman Ross Bennett said.

Minneapolis officials said they don't know yet whether they will have to borrow money to make up for the funding shift loss, but could make a decision as early as this week.