State scrambles for fixes as cash-flow crisis approaches

As state lawmakers and the Pawlenty administration prepare to address over $1 billion in shortfalls in the current budget, an even more immediate problem is looming. On Wednesday, state finance officials again told a legislative panel that Minnesota may need to borrow money as early as this spring simply to keep the state’s cash flow in the black.

And the potential fix the administration prefers would involve yet another delay in payments in Minnesota’s already cash-strapped schools.

Gov. Tim Pawlenty plans to unveil his 2010-2011 supplemental budget later this month. Based on the November economic forecast, the budget is projected to be $1.2 billion in the red, and the state is on a course to run out of cash at times when big payments come due this spring.

But Minnesota Management and Budget (MMB) officials and DFL legislators appeared to agree on one point: Minnesota won’t be able to make its payments even if they manage to cut $1.2 billion from the 2010-11 budget.

“You can fix it with cuts, but $1.2 billion isn’t enough,” said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis.

That’s because the state needs more money than is currently projected at certain times to make anticipated payments before the end of the 2010 fiscal year on June 30. And some potential cuts would have little or no impact on the state’s near-term cash flow.

Testifying before the Legislature’s joint Subcommittee on a Balanced Budget, State Budget Director Jim Schowalter said the anticipated cash crunch this spring stems largely from the fact that tax refunds are sometimes paid by the state before income tax revenue is received.

State finance officials in recent years have handled the ups and downs associated with cash flow by borrowing internally from other state funds.

The state at the beginning of this year borrowed $870 million from other funds in state government, like the Health Impact Fund, to keep cash in the general fund, Schowalter said.

Schowalter said borrowing between state funds isn’t unusual. But the transfers that have been supporting the general fund won’t be sufficient in the near future, he said.

“It’s probably not enough,” Schowalter said. “There are still going to be issues because there are no reserves, [and] because of the cyclicality of our revenues and spending. Fiscal ‘11 looked bad before the November forecast. It would continue to look bad after that problem is resolved.”

Between March and May, the state is expected to have negative cash flow, barring a remedy reached by lawmakers in the 2010 legislative session.

MMB Commissioner Tom Hanson said the state needs $400 million above zero in order to be able to handle the state’s payments as they come due at any given time.

A potential solution to the cash-flow situation is a heretofore unused law in which the state delays payments to school districts.

Hanson said he thinks the state can avoid short-term borrowing by using the law that allows the state to delay payments to school districts until May 30. Minnesota Department of Education official Tom Melcher presented the subcommittee with a spreadsheet that shows each Minnesota school district’s fund balances. The law spells out a complex formula for delaying payments based on how much money school districts have in reserve.

The law, written in Minnesota Statutes Chapter 127A.46, has been on the books since 1986. Melcher said the law has never been used.

Tapping school district reserves to keep the lights on in the state government will be controversial, said House Education Finance Chairwoman Mindy Greiling, DFL-Roseville. She said she expects school districts will oppose delaying payments.

“I think there will be a hue and cry if this is exercised,” Greiling said.

While MMB officials hope to get through 2010 without doing short-term borrowing, 2011 is a different matter.

A cash flow projection for 2011 shows negative cash flow balances for most months after the beginning of the fiscal year. “That is an unmanageable situation,” said Schowalter.

The fallout of Pawlenty’s $2.7 billion in unallotment last year of the 2010-2011 state budget is also an issue.

The specter of legal challenges to the unallotments is hanging over the budget proceedings.

Rep. Mark Buesgens, R-Jordan, asked Hanson if MMB has analyzed the cash flow outlook if lawsuits challenging Pawlenty’s unallotments prevail and the cuts are restored.

“Are we almost certain to have to borrow at that point?” Buesgens said.

Hanson said it would be “a fairly significant problem in our cash flow situation.

“It would make borrowing fairly likely,” Hanson said.

Borrowing could damage the state’s credit rating and thus raise the cost of incurring debt in the future. Hanson and Schowalter have downplayed that possibility, suggesting that there would likely be no damage as long as the state was open and deliberate about its plans for borrowing.

But MMB’s credit markets specialist, Kathy Kardell, was less sanguine when she testified before the same subcommittee earlier this month. “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].”