But $600M line of credit is still in place
As recently as February 2008, Minnesota’s fiscal situation was cushioned by $1 billion in reserves, and state officials did not need to worry about cash flow.
But after the ravages of a brutal recession and a series of state budget deals that have failed to bring fiscal stability, things have changed. The state no longer has the $653 million budget reserve it once enjoyed. And the state’s cash flow account is on its last gasp with a balance of less than $100 million — a far-from-reassuring cushion given the large payments for things like debt service and local aids and credits that the state might need to make on a given day.
In light of the financial context, the state’s cash flow projections for the 2012 fiscal year, which were recently completed by the Minnesota Department of Management & Budget, contain both good news and bad. The good news is that the state isn’t expected to run out of cash at any time between now and June 2012. In fact, MMB’s report indicates that the $792 million cash balance that the state had at the end of 2011 fiscal year on June 30 was $233 million more than forecast. MMB now says the “likelihood” that the state will have to do short-term borrowing to keep the lights on “has been reduced.”
The bad news is that the state’s till will get uncomfortably low at times.
The low point is expected to come in October, when the low cash balance is estimated at $267 million. That’s less than the $400 million that MMB officials have said in the past is the desirable amount of cushion.
Rep. Lyndon Carlson, DFL-Crystal, the lead DFLer on the House Ways and Means Committee, said the state is clearly not out of the woods when it comes to potential cash crises.
“The fact that it gets down to the $267 million,” he said, “and their own take is that it ‘reduces the likelihood’ that they’ll need the line of credit — they didn’t say they wouldn’t necessarily need to use it.”
State finance officials reported to state legislators early in 2010 that the state was projecting negative cash balances. They responded by taking out a $600 million line of credit with U.S. Bank. Although state lawmakers have not tapped the financing, the Associated Press reported in August that MMB Commissioner Jim Schowalter extended the line of credit for two years. That extension will cost the state $4 million.
Minnesota last resorted to short-term borrowing in 1985. While the state has seldom reached outside for emergency cash to pay for normal operations, it has done a lot of internal transfers of money to maintain liquidity. State finance officials have moved cash temporarily into the general fund from other pots of money, such as the Health Care Access Fund, to bridge gaps between payments and tax collections. At the beginning of 2010, the state borrowed about $870 million internally. But projections at that time indicated that the transfers might not be enough.
State finance officials during Gov. Tim Pawlenty’s administration labored in the winter of 2010 to avoid running out of cash. They leveraged a state law that allows the state to delay payments to school districts that had their own cash reserves. They also negotiated payment delays with the University of Minnesota and the Minnesota State Colleges and Universities system in order to keep cash on hand to pay other commitments.
But those fixes did not solve the systemic problems that have produced the chronic cash shortages. Further complicating matters, Gov. Mark Dayton and Republican legislative leaders last session spent about two-thirds of the cash-flow account, which had held $266 million as of the February economic forecast.
Other aspects of the budget deal have eased the cash crunch, however. The K-12 school aid shift, cuts to local aids and cuts to human services programs have reduced the amount of money that the state spends and has taken some pressure off day-to-day cash management issues, according to MMB officials.
Before the projected low point in October, the state’s cash balances are expected to drop from $1.3 billion in August to $519 million this month. The cash projection, at its monthly low points, hovers between $440 million and $490 million for the remainder of the year as the state makes large debt service payments to bondholders and local government aid payments to cities. The cash on hand at those points will likely be buoyed by a spike in sales tax receipts from the holiday shopping season.
While January sees a low of $659 million, the state at other points in the month is expected to have more than $1.5 billion in its coffers. The projections steadily decline over the course of the winter until the cash balance sinks to $358 million at its April low point. It rises from there and closes the fiscal year out in June in a range between $1.5 billion and $3 billion.
By living close to the edge, Minnesota makes its credit rating susceptible to downgrades by the bond houses on Wall Street. While cash management isn’t the only factor in judging the state’s fiscal management, an MMB official testified in 2010 that the rating agencies are paying close attention to state governments’ fiscal management as they try to weather the economic downturn.
This year, one ratings agency, Fitch Ratings, downgraded Minnesota’s creditworthiness. Fiscal policy observers are watching to see how another firm, Standard & Poor’s, rates Minnesota.