School districts to the (involuntary) rescue

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The Minnesota Department of Education (MDE) announced Jan. 26 that the state will be delaying aid payments to Minnesota schools in response to the state’s cash flow problems. Using the authority under Minnesota Statutes 127A.46, the March and April 2010 aid payments of 231 Minnesota school districts will be reduced by an estimated $423 million. Currently, it is expected that this reduction will be repaid to school districts at the end of May.


The MDE has released a spreadsheet (xls) that lists the March and April payment delays for each school district. (Refer to column AC in the first tab of this spreadsheet for the total payment delay for each school district.) In general, the payment delays are targeted to districts based on the size of their “net unreserved operating fund balance”; the larger the per pupil fund balance, the larger the payment delay, all other things being equal. The amounts on this spreadsheet are subject to revision.


This is not the first time that Minnesota school districts have been called upon to bail out the state. During the “no new tax” era (i.e., since FY 2003), annual real per pupil state dollars to Minnesota school districts have declined by 14 percent, as ongoing state budget problems have translated into fewer state dollars for schools. In addition, the governor has solved much of the state’s deficit problem in the current biennium by shifting $1.8 billion in state payments to school districts into the next biennium (although the status of this shift is uncertain in light of the recent court ruling regarding the propriety of the Governor’s July unallotment).


The aid payment delays announced yesterday differ from the $1.8 billion school aid shift that the Governor implemented using his unallotment authority last July. Last July’s shift was designed to resolve the budget deficit (i.e., the gap between revenues and expenditures) that existed within the state general fund at the end of the current biennium. The payment delays address a cash flow problem resulting from the fact that state will run short of revenue at points during the course of the biennium due to the timing of when it is scheduled to collect revenues versus when it is scheduled to make expenditures. The state’s cash flow problem is described in a recent Minnesota Management & Budget report.


The payment delays to school districts are not a pain-free solution to the state’s cash flow problem. It will cost school districts in the form of lost interest on investments and could create cash flow problems for some districts.


In addition, the school payment delay creates perverse incentives for school districts. As noted above, the aid payments are targeted at school districts with the largest fund balances. Sound budgeting practice dictates that districts keep adequate reserves on hand to deal with unanticipated cost increases or revenue reductions.  What incentives will school districts have to keep adequate fund balances if they are not on hand when needed due to the fact that these balances have already been borrowed by the state?


At this point in time, the school aid payment delay appears to be an unavoidable evil. Tax increases and spending cuts, even if they could be made today, probably couldn’t take place in time to solve the March cash flow crisis. In addition, it is best for the state to avoid short-term borrowing, even if it does mean shifting the state’s cash flow problem on to school districts. As noted by the Minnesota Budget Trends Study Commission, short-term borrowing on the part of the state could jeopardize the state’s credit rating, which would be bad not only for the State of Minnesota, but for its political subdivisions, including school districts.


However, the current cash flow problem could have been avoided during the 2009 legislative session. As a precondition for using his unallotment authority, the governor first had to allow the state’s budget reserve to hit zero, thus leaving only the cash flow account to deal with unanticipated budget problems. When state revenues again dropped below expected levels, the cash flow account was not sufficient to cover the state’s commitments, thereby resulting in the current cash flow problem.


This problem could have been avoided if the governor and legislature had negotiated a balanced budget during the 2009 legislative session that maintained both a cash flow account and an adequate budget reserve. This would have eliminated or at least reduced the magnitude of the current cash flow predicament.


The state is expected to experience more cash flow troubles in the fall of 2010. In order to avoid the next round of cash shortages, it is important for the governor and the legislature to find a solution to Minnesota’s ongoing financial quagmire that involves a mix of spending cuts and revenue increases that will balance the state budget for the entire biennium and ensure that the state can meet its financial commitments at all points within the biennium.