State weighs short-term borrowing

Cash crunch could become critical in the spring

State finance officials last week told a House and Senate budget panel that they might have to borrow money for the first time since 1984 in order to keep state government operating. And a senior debt-management analyst conceded that the move could damage Minnesota’s credit rating.

During a hearing of the Balanced Budget Subcommittee, Minnesota Department of Management and Budget (MMB) Commissioner Tom Hanson said he didn’t know for sure if his department would have to borrow money in the next two years to pay for state operations. But the state’s coffers could run too low on cash when it comes to time to make large payments during the course of the biennium.

“It still…will depend on what our actual collections are in the months to come,” Hanson said. The greatest near-term stress on Minnesota’s general fund cash flow is expected to come in March-April of 2010, he added.

The panel, which is chaired by Sen. Larry Pogemiller, DFL-Minneapolis, and Rep. Lyndon Carlson, DFL-Crystal, is a subcommittee of the Legislative Commission on Planning and Fiscal Policy. Hanson is GOP Gov. Tim Pawlenty’s point person on state financial management.

The state’s cash situation has deteriorated during the past couple of years because of the weakened economy and budget-balancing decisions like using up general fund reserves.

MMB calculated Minnesota’s current cash balance at $254 million. Between now and the end of the year, the cash balance will briefly hit $725 million and slide to $220 million as revenues are received and payments for obligations such as local government aid (LGA) and school aid are made.

MMB officials are putting together a cash analysis that will provide a better idea of when the state can expect to encounter low points in its cash balance.

Hanson told the committee, in response to a question from Pogemiller, that he doesn’t know if the state will have to borrow money to pay for operations.

“Mr. Chairman, if I knew, I would tell you. I don’t know. …Probably more likely in 2011 at this point depending on how the revenues come in,” Hanson said.

Sen. James Metzen, DFL-South St. Paul, asked if Minnesota’s bond rating could get cut if state officials do short-term borrowing. The state would have to pay higher interest costs if the rating agencies downgrade the state’s debt.

“Does that affect our bond rating?” Metzen said.

Assistant Commissioner for Treasury and Debt Management Kathy Kardell said Metzen’s fear is reasonable.

“It certainly might,” Kardell said. “Liquidity for all government entities, whether they are states, cities, counties, schools are being looked at very closely by the rating agencies. …If we do need to do that, I cannot foresee their actions, but they may very well take an adverse [action], one or more of the rating agencies,” Kardell said.

Hanson said it would be better for the state to borrow in “short bursts” rather than “springing it on everybody” at the ratings agencies at the last minute.

“We’re trying to what we can to mitigate whatever downfall there is,” Hanson said.

In order to do short-term borrowing, the state has to receive an advisory recommendation from the Legislative Advisory Commission (LAC). Members of the LAC include Pogemiller and House Speaker Margaret Anderson Kelliher, DFL-Minneapolis.

Cash flow is different from budgeting, said State Budget Director Jim Schowalter. As a result, spending cuts or tax increases in the 2010 legislative session might not smooth out the gaps between payments and collections that the state needs to make on any given day.

Much of the demand for cash is based on the size and time of the payments.

Some payments, like LGA, are large payments that happen only once or twice a year. Cuts to those kinds of programs have a bigger impact on the cash flow problems, Hanson said.

Other examples, Hanson said, like cutting health and human services payments, which are made several times a year, would have less of an immediate impact on the state’s cash balance.

“It’s the topic of when, not just the amount, that is new for all of us in this process,” Hanson said.

The state has already delayed some payments to deal with its cash crunch.

In November, the state temporarily delayed corporate and sales tax refunds. The state also worked out an agreement to pay the University of Minnesota on Dec. 27 rather than the scheduled date of Dec. 15.

Kardell explained two options under consideration for short-term borrowing: a line of credit or a private placement of certificates. MMB is preparing a request for proposals from financial institutions for those two financing options.

“We would anticipate, at a minimum, taking proposals on those two options, probably in January,” Kardell said. Each approach has its drawbacks, she said. The certificate would probably have a lower interest rate than the line of credit, Kardell said. But the state would start paying interest on the full amount of the certificate, while the state would only pay interest on the amount it draws from the line of credit, Kardell said.

The prospect of short-term borrowing has rekindled criticism by DFLers of last session’s budget negotiations.

Pogemiller and Carlson told reporters after the hearing that the state wouldn’t need to borrow money if Pawlenty hadn’t vetoed the revenue proposals in last year’s omnibus tax bill.

“It’s not a situation we should have gotten in,” Pogemiller said.

The subcommittee is tentatively scheduled to meet again Jan. 15.