If the COVID-19 crisis is hurting your local government’s cash flow, you might be looking to borrow from restricted funds. A restricted fund is one containing revenues that are intended for a certain purpose due to legal or contractual constraints. However, if such a fund is holding cash that’s not needed currently and it’s legally available to be invested, then it may be loaned to other funds. Here are a few things to keep in mind:
Check these things before you make interfund loans
For the lending fund
Check for any commitments or restrictions that might prevent the fund from loaning out its idle cash. This includes checking state laws and your local ordinances or resolutions. You should consider working with your legal counsel, bond counsel, or others to do this analysis. It’s also critical to evaluate the fund’s future cash needs to provide ongoing services, make its debt payments, and maintain and invest in its infrastructure. Just because it has idle cash now doesn’t mean that the fund doesn’t need its cash later. A long-term forecast will be important for determining how long a fund might loan excess cash to another fund.
For the borrowing fund
This fund needs to be solvent, which means having enough anticipated revenues or income available to repay the loan. In addition, it needs to be able to repay the loan in a relatively short time – three years is the typical benchmark. You want to avoid the appearance of any long-term loans that are, in reality, a permanent diversion (in other words, a transfer) with no intention of repayment.
Make sure to follow these requirements
If you decide to move forward, then you’ll want to make sure you follow certain requirements. Here are a few highlights:
- Loans must be documented and authorized by the governing body, such as in a resolution or ordinance.
- There must be a planned repayment schedule of the principal as well as interest. The due dates for principal and interest should be specified.
- The lending fund must charge a reasonable rate of interest, based on the rate available to the local government. For example, if you were to obtain a line of credit from your bank, what would that rate be?
- Accounting records must be maintained to reflect any interfund loan balances.
- The governing body should review the loan status annually at an open public meeting.
For a full discussion of the requirements, view the Budgeting, Accounting, and Reporting System (BARS):
- For GAAP entities: www.sao.wa.gov/bars_gaap/accounting/interfund-activities/loans/
- For cash basis entities: www.sao.wa.gov/bars_cash/accounting/interfund-activities/loans/
In addition, you might want to read a Washington State Attorney General Opinion on this subject (AGO 61-62 No. 29):
If you have a specific question about interfund loans, or how to account for them, send us a question using our help desk feature in the client portal. However, questions of a legal nature should be directed to your legal counsel.