Lawsuit fallout could add to state’s cash crunch

Legislators watching and waiting for now

A judge’s undoing of one of Gov. Tim Pawlenty’s 2009 unallotments hasn’t thrown state lawmakers into a flurry of budgetary wrangling - yet.

Finance committee chairs in the DFL-controlled House and Senate say they are busy right now focusing on the $1.2 billion budget deficit that was announced in the November economic forecast.

Ramsey County District Chief Judge Kathleen Gearin’s Dec. 30 order invalidating a $5.3-million human services cut made unilaterally by the Republican governor isn’t taking center stage at the Legislature.

But if other groups affected by the $2.7 billion in unallotments also take Pawlenty to court, the budget hole could grow larger, said Senate Finance Committee Chairman Richard Cohen, DFL-St. Paul.

“If further court rulings reinstate other unallotments, that’s a very good thing relative to the way state government ought to run. But it certainly will create additional deficits that need to be resolved,” Cohen said.

The prospect of increased budgetary stress comes as Minnesota Department of Management and Budget (MMB) officials are bracing for the prospect of cash flow troubles that could necessitate short-term borrowing by the state. Officials at MMB last month testified in front of a House and Senate panel that Minnesota’s general fund will likely face a cash crunch at certain times during 2010 and 2011.

State Budget Director Jim Schowalter said MMB is preparing a new set of cash flow projections to be presented next week before a subcommittee of the Legislative Commission on Planning and Fiscal Policy.

The commission’s Subcommittee on a Balanced Budget, which is co-chaired by House Finance Committee Chairman Lyndon Carlson, DFL-Crystal, and Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, will convene the Jan. 13 meeting at the state Capitol.

Gearin’s decision to overturn Pawlenty’s $5.3 million unallotment, which pays for a nutrition program for low-income people, adds to the state’s financial stress-but for the moment, only slightly.

Schowalter said the $5.3 million expenditure for the program won’t alter the cash flow information that will be presented on Wednesday to the subcommittee.

“That really isn’t a material impact on the cash flows, which can vary by hundreds of millions of dollars in any given day. The $5 million judgment really doesn’t affect that cash flow forecast,” Schowalter said.

The 2010-2011 budget situation, which is highlighted by the $1.2 billion projected deficit based on the November economic forecast, could worsen if the courts overturn more of Pawlenty’s unallotments. So far no other petitions have been filed with the court.

But legislators are wondering whether additional legal actions will now be filed.

“It will probably take a while before some of them make announcements of a brief,” said Carlson. “But I would be very surprised if there aren’t various groups and individuals that are considering their options.”

A larger deficit would hasten the day when the state has too little cash on hand to keep current with its expenses, according to Cohen.

“If [a reversal of Pawlenty's budget cuts] was carried out more broadly, it would almost ensure that the administration would engage in short-term borrowing,” Cohen said.

If that scenario plays out, lawmakers are concerned that credit-rating agencies would lower the state’s bond rating. The topic had already been discussed at length by lawmakers and MMB officials before Gearin’s decision.

On Dec. 14, the Balanced Budget Subcommittee took in-depth testimony from MMB officials about the state’s cash flow situation. Members of the committee, including Sen. Jim Metzen, DFL-South St. Paul-who is a banker by trade-pressed MMB Commissioner Tom Hanson on whether the state would need to do short-term borrowing.

That step, which Minnesota was last forced to take in 1984, could damage the state’s credit rating, MMB Assistant Commissioner Kathy Kardell told the panel.

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

Gearin’s ruling on the nutrition program, however, won’t drag down the state’s credit rating, Schowalter said.

“The immediate impact of this judgment shouldn’t have an impact on the rating agencies at all,” Schowalter said. “They would be looking at the broader economy, the broader budget situation, which are bigger factors and not the individual $5 million judgment.”

Of the $2.7 billion in unallotments made by Pawlenty last year, $1.3 billion came from fiscal year 2010 budget allocations, and $1.4 billion from 2011. Included in the 2010 unallotments are a little more than $1 billion in school-aid cost shifts. The total amount of the school shift for the biennium is $1.7 billion.

Pawlenty reportedly wants a limited special session to have the Legislature pass his “mimic” of a school-aid shift into law. Pogemiller, however, rebuffed the special session idea on Minnesota Public Radio’s Midday program. That leaves the issue of the legal standing of the unallotments hanging in the balance until the 2010 legislative session, which starts on Feb. 4.