So I promised to revisit the balance sheet when I had the chance. I want to talk about the current ratio because it is one of the reasons I refer to the District as being a financial disaster and because current ratio is part of the modified Bank of Alameda loan agreements. Current ratio is just Current Assets/Current Liabilities. It is unclear whether, if push came to shove, the District would include restricted assets in that calculation, but, for now, they do not. The current ratio needs to stay greater than 1.0 to be compliant with the modified loan agreement.
Now the 2003 current ratio is a respectable 3.08. That is a fairly desirable number. It’s actually even better since there was enough cash and liquid investments to cover 100% of the current liabilities. In fact, the District in 2003 had enough cash to pay down every debt to zero. In 2011, the current ratio is a dismal 1.05 and the cash would barely cover 10% of the current liabilities.
For purposes of the loan, most likely the current ratio will dip below 1.00 at some point in this fiscal year, but that event may or may not coincide with the quarterly test dates (9/30/11, 12/31/11, 3/31/12, and 6/30/12). For the current ratio to dip below 1.00, current assets minus current liabilities would need to be less than zero. The Districts current “cushion” from this happening is a little under 1 million dollars –$970,785 to be precise. Any combination of decrease in current assets or increase in current liabilities that totals more than this will cause the current ratio to fall below 1.00.
1. Borrowing short term and paying off bills will not change the current ratio because it just rearranges the current liability numbers so accessing the emergency LOC from Bank of Alameda does not change much.
2. Borrowing short term and holding cash or purchasing short term assets changes the current ratio (decreases it), but does not change the “cushion” because increasing the numerator and the denominator of a ratio by the same value just moves it closer to 1.00, but will not change the sign of the log.
3. Borrowing long term and holding cash or purchasing short term assets changes the current ratio (increases it). In fact, this is a desirable situation so I have never understood what it means to think that the lack of long term debt for the District is an especially positive aspect of the balance sheet. Sure less long term debt is better than more long term debt, but, on the whole, adding to long term debt to adjust other parts of the balance sheet is almost always a positive.
4. Borrowing short term and increasing fixed assets changes the current ratio (decreases it) and decreases the “cushion”. This is the main reason I believe that the District is almost guaranteed to have a current ratio below 1.00 because, until the wound care construction loan is converted, it is short term debt. The wound care build out is fixed assets so with a draw of 700k, the “cushion” just got reduced to less than 300k at some point when construction is nearing completion, but conversion of the loan has not happened yet.
5. Losses on a ytd basis that exceed 300k. It will not be good enough for the District to make a profit in the coming year, that profit will have to be consistent on a year-to-date basis. Someone can check me, but I do not believe the District has had more than 3 years since its formation where this was true. Certainly neither of the last two years would the District have achieved this goal.
Two big numbers to watch for to determine if the District can maintain the 1.00 current ratio will be the July income numbers, after the parcel tax subsidy is applied, of course (positive is a positive sign and negative is terrible); and the final IGT number from CMS since even a relatively modest 50k hit takes away another 1/6 of the “cushion”.