State's cash flow problems may temporarily delay school payments

Minnesota has a cash flow problem to go along with its $1.2 billion deficit problem. And it's a good bet that the state will try to solve it, at least in part, by additional delays in school aid payments this spring to those districts with some "cash on hand."

The topic, aired at last Wednesday's Legislative Commission on Planning and Fiscal Policy hearing, got ample news coverage in the Star Tribune, Pioneer Press, Minnesota Public Radio, Politics in Minnesota, the Session Daily and Capitol Chatter.

Here's the gist. There are times of year when the state is paying more in expenses than it has received in revenues. Minnesota Management and Budget (MMB) is able to handle the situation by doing inter-fund loans -- like temporarily borrowing money from a special revenue fund to cover costs in the general fund. These are very short-term loans, since the state's overall cash balance can vary by more than $1 billion over the course of a month. Inter-fund borrowing is standard procedure to handle cash flow issues and happens even in years when the state is enjoying a surplus.

Late last year, however, the state started facing a particularly low overall cash balance in the state's statutory general fund (that's about 70 state funds lumped together, including the general fund, special revenue funds, Health Care Access Fund and Minnesota State Colleges and Universities fund). Having a low cash balance creates a cash flow problem because there may not be any money available to do inter-fund loans. And that means the state runs the risk of, well, bouncing the proverbial check. We are facing the state's worst cash flow situation since the 1980s.

If there isn't enough money to borrow from other funds, then MMB must turn to other options. Early last November, the state chose to delay corporate and sales tax refund payments, to the tune of $146 million. The state paid the refunds by December, but another cash dip is coming this spring. At its worst, this April, the state has a projected deficit of $143 million in its statutory general fund.

So once again, the state has to find some money to tide it over until revenues flow in during June.

MMB commissioner Tom Hanson and James Schowalter, state budget director, laid out tentative options to fix the problem. They say the state needs $550 million in either payment delays, line-of-credit borrowing or other legislative/administrative actions to get through this spring's cash flow lows with a minimal cash cushion.

MMB staff do not foresee an immediate need for short-term borrowing in FY 2010, but want to have a plan in place to deal with a worst-case scenario. Next week, MMB will bring a borrowing proposal to the Legislative Audit Commission.

Instead, the administration is focusing on payment delays to manage the cash flow situation. MMB staff outlined five options for payment delays: 1) vendor payments; 2) provider payments; 3) higher education payments; 4) school districts payments and 5) tax refunds. The administration is focusing on options 3-5.

In the hearing, there was much discussion about the possibility of delaying K-12 aid payments. That prospect doesn't sit well with school leaders who have already been coping with earlier state budget decisions to delay school aid payments.

Worst case, some school districts, such as Minneapolis, could have all their aid payments delayed for March, April, and May this year (MMB staff emphasized that they do not expect a worst-case scenario). The potential payment delays are based on school district balances from last June, focusing on delaying payments to districts that have "cash on hand" to carry them through. Any delays in payments would have to be fully repaid by the end of the fiscal year, June 30.

To be clear, these payment delays would not help solve the state's $1.2 billion budget deficit (like the delay in school payments Pawlenty implemented through unallotment). Payments would only be delayed within the current fiscal year until sufficient revenues came in to pay the bills.

At this point, the delay in payments to school districts is just an option. MMB is continuing to look into the situation. MMB is also expected to issue a detailed cash flow report to the legislature this Friday (January 15).

Unfortunately, the state's cash flow problems only get worse in FY 2011. MMB is currently projecting that the state will face negative cash balances from August 2010 through May 2011. The solution to the state's $1.2 billion deficit for the current biennium could help ease cash flow issues in FY 2011, but is unlikely to solve the problem.

A video of the hearing is available. Our earlier blog on this topic provides more background.

Scott Russell

Scott Russell (scott@tcdailyplanet.net) wrote for the Southwest Journal and Skyway News (now the Downtown Journal) in Minneapolis from 1999-2005. He also wrote for The Capital Times, a Madison Wisc