Fiscal situation improves, but more trouble looms

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The state’s short-term fiscal outlook has improved, but another recession could easily reverse its fortunes, officials told a joint legislative panel.

Members of the Legislative Advisory Commission were given an update on the state’s cash flow outlook. Jim Schowalter, commissioner of Minnesota Management & Budget, said the state ended its fiscal year in June with an extra $233 million in the treasury. He said the improved cash balance will likely preclude the need for any emergency short-term borrowing in the current fiscal year.

“We’re looking at improved numbers from where we were last year,” Schowalter said, calling the latest projections “good news.”

Over the last several years, the slumping economy has precipitated a drawdown in the state’s cash reserves. To keep the state operating, budget officials have resorted to moving money back and forth between different state accounts (inter-fund borrowing) and temporarily delaying certain payments and tax refunds.

In 2010, the state arranged for an emergency line of credit with U.S. Bank. With as little as 24 hours’ notice, the state can borrow up to $600 million to keep state coffers from running dry. So far, it hasn’t been used, but state officials renewed the deal for the current fiscal year just in case.

Today, members of the commission voted to authorize MMB to retain the current line of credit. Schowalter emphasized that borrowing would be MMB’s option of last resort — and in any case, probably won’t be necessary.

“At this point, I do not anticipate cash flow borrowing… but there are low points, and there are risks around these numbers,” he said.

Although the state’s budget situation appears to be looking up, the state’s long-term economic outlook is less rosy.

State Economist Tom Stinson said much slower growth is now projected for the U.S. economy this year — and in fact, another recession may be coming. He said increasing gas prices, the tsunami in Japan, the debt crisis in Europe and political gridlock in Washington, D.C., have all cast doubt on the prospects for recovery. (Read the latest economic update from MMB.)

The extra cushion in the state’s cash accounts might not last very long if the economy tanks again.

“We still have a little bit of space on the forecast, but the economic outlook has turned down pretty substantially,” Stinson said.

He said the odds of another recession starting as early as this fall are now estimated to be between 40 percent and 50 percent, which he called “extremely high” from a statistical standpoint.

“These are significant changes in the economic outlook. These, in economists’ terms, are ‘non-trivial,’” Stinson said.

He added that additional economic stimulus, in the form of a federal extension of the payroll tax cut enacted in December, will likely be needed if a recession is to be avoided.