Nonprofits Assistance Funds Loan Approved
Parnassus Board of Directors Approves Loan From Nonprofits Assistance Fund
By Greg Friess, Founder & Treasurer, Board of Directors - Jan. 2012
On Tuesday January 24th, during a specially called meeting, the Parnassus Board of Directors approved a motion to move forward with a line of credit agreement with Nonprofits Assistance Fund (NAF). Nonprofits Assistance Fund is a Minnesota corporation whose mission is to build financially healthy nonprofits that foster community vitality. Their clients include a number of charter schools in the State of Minnesota.
Parnassus, like many businesses and all public schools in the state, experiences a mismatch in the timing of our expenditures and our revenues. As those of you who follow public education finance here in Minnesota know, our state legislature has instituted a 'holdback' whereby they delay making some of their payments to schools. This is an issue that impacts every public school district in the state.
Our Budget and Fund Balance
For the current school year, Parnassus' current budget projects total revenues of $2,805,990 to go with expenditures of $2,540,922 resulting in an expected 'fund balance' (similar to retained earnings) of $265,068. Said another way, we are planning to spend $265k less than we take in this year resulting in a fund balance that is over 10% of our expenditures.
The majority of our revenues, $2.3 million, come from the State of Minnesota. As noted above, there is a holdback on a portion of this money. Current law is that the state holds back 40% of our revenues for payment in our next fiscal year. For Parnassus, this means that we will be getting approximately $900k of our revenue for fiscal year (FY) 2012 in FY 2013. (For the accounting inclined, public schools use modified accrual accounting while the state uses cash accounting....allowing the holdback money to show up on both sets of books). Thanks to a conservative budget and tight controls on our spending, we only expect to borrow up to $625k of the $900k holdback, saving thousands of dollars in financing costs.
To manage the holdback, all public schools rely on some combination of either spending from their fund balance (retained earnings) or borrowing. Being a first year school, we do not have a fund balance to rely on so we need to borrow funds. Many first year charters have a difficult time finding a lending partner and end up incurring extremely high borrowing costs (annualized interest cost north of 20% have been reported). In fact, NAF has not lent to any first year charters in a number of years. Banks are even more hesitant to lend to any start-up organization. We are fortunate that based on our record of success in recruiting students, our conservative budget, and year-to-date experience, we have options with borrowing partners not typically available to first year organizations. This allows us to save some money on borrowing costs.
Make no mistake, there are real costs to all public schools to borrow money to manage the state holdback. Depending on the final borrowing amount, this loan could cost us up to $16,000 in fees and interest. That is why it is important for Parnassus to continue to spend prudently, grow our fund balance, and establish a strong reputation in the marketplace. A growing fund balance allows us to reduce the amount we need to borrow. It also increases our credit worthiness with potential lending partners to reduce the fees and interest rates we have to pay on what we do need to borrow.
We are pleased with the partnership with NAF and are fortunate to have this issue resolved so that we can return our focus to improving the quality of education we deliver to our students and our children.