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Cash flow conundrum

Published (2/11/2010)
By Nick Busse
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Cash flow, an issue typically left in the hands of Minnesota Management and Budget, has emerged as a topic of concern for the Legislature this year. Lower-than-expected tax receipts caused by the recession have dried up the state’s cash reserves, forcing state budget officials to get creative to avoid a shortfall.

Over the last two years, MMB officials have been moving money around between different state accounts, using what’s called “inter-fund borrowing” to keep the state budget afloat. Now, they’re preparing to use more dramatic methods, delaying payments to school districts or even borrowing money from banks in order to keep paying the state’s bills.

State Budget Director James Schowalter said the issue of cash flow is separate from — but related to — the state’s biennial budget problems.

“Right now, what we’re talking about is, on a day-to-day basis, do we have the cash in the bank?” he said.

Schowalter discussed the problem at a joint meeting of the House Finance and Ways and Means committees Feb. 8. He said even if lawmakers reach a deal with Gov. Tim Pawlenty to close the current biennium’s $1.2 billion budget gap, the state will still face cash flow shortages beginning this spring, and probably again in the fall.

Schowalter said MMB is preparing a number of possible solutions to the problem, and is closely monitoring the daily ebb and flow of money in state accounts. Still, he said the state’s cash flow isn’t always fully predictable.

“We’re trying to deal with a number of different risks and make sure that the Legislature, the governor and the state generally have options, no matter what comes,” Schowalter said.

A growing problem

For those who’ve never heard the term “cash flow,” here’s how it works.

Every two years, lawmakers enact a biennial state budget. The state constitution requires that the budget be balanced, meaning that spending is less than or equal to tax revenues.

However, expenditures and revenues aren’t always timed conveniently; some months, the state has big bills to pay but not much revenue coming in, while other times the opposite is true. The term “cash flow” simply refers to the movement of money into and out of state accounts to cover the state’s day-to-day expenditures.

Cash flow shortages in the state’s General Fund can occur even when the budget is technically balanced. When that happens, MMB can transfer money into the General Fund from other state accounts and pay it back later.

“That is not an unusual situation — though it is unusual the extent to which the commissioner is using it now,” Schowalter said.

The problem is that this year, the projected cash flow shortages are so large that inter-fund borrowing (to the tune of $945 million already in this fiscal year) won’t be enough to manage it.

As of April, the state’s General Fund is projected to be $143 million in the negative — far less than the $400 million cushion MMB says is needed at any given time. To deal with the problem, MMB plans to delay a number of payments in March and April: $423 million to K-12 school districts; $52 million to the University of Minnesota; and about $60 million in corporate and sales tax refunds.

Under the plan, the delayed payments would be fully reinstated by June, after income tax receipts refill state coffers. Additionally, school districts with cash reserves of less than $700 per pupil would not see any payment delays. Still, many lawmakers are critical of the idea.

“It’s not just robbing from schools; it’s slapping them in the face for being fiscally responsible,” Rep. Mindy Greiling (DFL-Roseville), chairwoman of the House K-12 Education Finance Division, said at a Jan. 13 joint legislative hearing.

The last resort

Schowalter and other MMB officials say there’s not much of a choice, however. In fact, state law requires that school districts’ cash balances be drawn down even more — all the way to $350 per pupil — before the state can move on to its next option: borrowing.

If Minnesota has to borrow money to pay its bills later this year, it won’t be the first time. During the last major economic crisis in the early 1980s, the state resorted to short-term borrowing several times: $150 million in 1981, $360 million in 1982, $950 million in 1983 and $200 million in 1984.

Katherine Kardell, MMB’s assistant commissioner for treasury and debt management, said the state is preparing to borrow up to $600 million to cover possible cash shortages in the fiscal year beginning July 1, 2010.

This borrowing would likely take the form of either a line of credit or “certificates of indebtedness” — basically short-term loans to the state. MMB recently sent out a request for proposals from any interested financial institutions, and responses are due Feb. 18.

Any money the state borrows would have to be paid back by the end of the biennium, and would be backed by the full faith and credit of the state — essentially, a promise to levy a statewide property tax in case the state doesn’t have the money to repay the loans.

That notion leaves some legislators feeling uncomfortable.

Rep. Lyndon Carlson (DFL-Crystal), Finance Committee chairman, asked Schowalter whether the state might not be creating a problem for the next governor. He noted that Pawlenty will be leaving office before the principal on the loans would be due.

“What would happen if there wasn’t enough cash in the bank at the end of the biennium to make that payment?” he asked.

“I am fairly confident that we’ve got a plan to start to manage those risks,” Schowalter replied.

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