An account description such as “overdraft of cash on deposit” is acceptable for a school district’s internal accounting records to show a negative cash balance on deposit with the county treasurer; however, it is not appropriate for external financial reporting. This presentation is not appropriate for external financial reporting because it does not reflect the nature of the liability, such as interfund borrowing, credit line payable, or an amount due to the county treasurer for investing in the school district’s debt (overdraft). Also, if interfund borrowings are not presented, it may result in cash being overstated in other funds.
In accordance with A.R.S. §15-996, county treasurers must hold school district monies in 1 of 2 ways. First, treasurers may keep a separate account for each school district fund. Second, treasurers may maintain only 2 accounts for each school district plus additional accounts for each of the bond building, debt service, and new school facilities funds. If only 2 accounts are maintained, the first account must consist of the budget-controlled funds (maintenance and operation, unrestricted capital outlay, adjacent ways, and classroom site funds), and the second account must consist of federal and State grant monies and all other monies.
In accordance with A.R.S. §15-304, school district governing boards may authorize expenditures from budget-controlled funds up to the amount of the adopted budgets regardless of the amount of cash available in the fund. Also, when sufficient cash is not available in federal and State grant funds, if county treasurers maintain 2 accounts as provided in A.R.S. §15-996 and expenditures have been included in the budget section of federal or State grant applications, the school district governing boards may authorize expenditures from federal and State grants as authorized in the budgets. As a result, cash deficits may occur in these funds.
When cash deficits occur, Arizona Revised Statutes provides the following options.
In some cases, a school district may have interfund borrowings that reduce or eliminate a fund’s cash deficit with the county treasurer. In accordance with A.R.S. §15-996, interfund borrowings may occur between (1) budget-controlled funds or (2) if 2 accounts are maintained as described above, federal and State grant funds may borrow from other funds in the second account or, if the amount in the second account is negative, from the maintenance and operation fund. Interfund borrowing should be reported as interfund payables and receivables in the financial statements.
Another option for budget-controlled funds, in accordance with A.R.S. §11-604.01, is for the county treasurer to establish a revolving line of credit on behalf of the school district with the county treasurer’s servicing bank. The credit line could then be used to finance the school district’s short-term borrowing needs in budget-controlled funds when cash balances are insufficient. With this option, a school district would report a line of credit on its financial statements.
If a revolving line of credit has not been obtained for a school district or if the revolving line of credit has been spent and if there are insufficient monies in the district's accounts, the county treasurer may register warrants, substitute checks, or electronic funds transfers of budget-controlled funds in accordance with A.R.S. §11-635. The registered items should be reported as a payable on the financial statements. Alternatively, county treasurers may invest in a school district’s registered warrants, substitute checks, or electronic funds transfers (evidences of indebtedness) in accordance with A.R.S. §35-323. If the county treasurer chooses to invest in the registered items by paying the amount and collecting amounts due from the school district, the school district should report the balance as due to the county treasurer.
Cash deficits should not occur in funds other than the budget-controlled and federal and State grant funds since the governing board should not authorize expenditures from other funds unless sufficient cash is available in the individual fund. If sufficient cash is not available, the expenditure should be reclassified to another appropriate fund that has cash or budget balance available, as applicable.
If a school district has individual funds with short-term cash shortfalls that are not appropriately addressed by the options above but has other funds with cash available to make up for that shortfall, the school district should report interfund payables and receivables on the financial statements between the fund with the cash deficit and the fund(s) from which it presumably borrowed. Because many funds have restrictions placed upon them, such borrowing may violate statutory restrictions and result in compliance audit findings.
School districts should communicate with either or both their county school superintendent’s and county treasurer’s offices regarding how cash deficits have been handled to ensure proper financial statement presentation. Also, the notes to the financial statements should contain all required disclosures for interfund receivable and payable balances, payables, or short-term debt.