Cash flow: State could have to start borrowing as early as this fall

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Though Minnesota has managed so far to avoid borrowing to meet the state’s day-to-day payment obligations, its good luck (and capacity for fiscal manipulation) is likely to run out before the end of FY2011 on June 30 of next year, and possibly as early as this fall.

In response, the state’s finance authority, the Department of Management and Budget (MMB), is recommending that the state set up a $600 million line of available credit by September 2010.

That was the word this morning from MMB Commissioner Tom Hanson and two of his deputies, budget director Kristin Dybdal and credit markets specialist Kathy Kardell, in testimony this morning before the Legislative Advisory Commission.

The LAC declined to endorse MMB’s recommendation to establish a line of credit, but the LAC’s role is purely advisory and has no legal impact on what the agency chooses to do.

Paper trail: Here’s an electronic copy of the presentation documents (PDF). (See especially the cash flow breakout on page 9.)

Some key points from the hearing:

• Though Minnesota’s statutory general fund — which consists of all the funds, inside and outside the general fund proper, that can be manipulated to balance the state’s payments — is not projected to go into the red until December 2010, it will dip to perilously low levels by October. Dybdal suggested to the LAC that the state might need to borrow money at around that time.
• In FY2010, MMB used $1.050 billion in inter-fund borrowing and $501 million in payment delays to keep the state technically current with its payment obligations. But it will have fewer payment delay options in FY11, especially where school districts are concerned. In FY10, the state had the authority to delay $442 million in school payments, and used $422 million of that authority. But owing to much smaller cash-on-hand balances in the state’s districts at the end of FY10, the funding formula this time around will only permit $83 million or less in K-12 payment delays.
• MMB officials and legislative leaders had hoped that $408 million in additional federal health care dollars would be sent Minnesota’s way after the end of the 2010 legislative session, thus easing the cash situation for FY11. But in response to direct questioning from Senate Finance Committee chair Dick Cohen, DFL-St. Paul, Dybdal said there was “little hope” that the FMAP money from Washington would still be forthcoming.
• Asked by reporters afterward if utilizing a line of credit would precipitate a downgrade in the state’s credit rating, Hanson said simply, “I don’t know. I hope not.”