Normally, worrying about how to solve a $1.2 billion state budget deficit would be enough to keep everyone occupied during a legislative session. Now policymakers need to add figuring out the state’s cash flow problem. To help us get a handle on the situation, we can look at a report Minnesota Management and Budget (MMB) released last Friday.
Balancing the budget is about making sure the state’s revenues and expenditures match up over the course of two years. Managing cash flow, on the other hand, is making sure the state’s revenues and expenditures match up in the course of a single day.
The state always needs to manage cash flow. Not surprisingly, the timing of the state’s payments doesn’t always coincide with the state’s revenue collections. Through the course of the year, the state’s general fund will often have a negative balance. Behind the scenes, MMB handles this by:
- Using the state’s cash flow account (currently at $350 million).
- Temporarily borrowing from the state’s budget reserve (although that doesn’t help right now, since the budget reserve is currently empty).
- Temporarily borrowing from other state funds that are part of the statutory general fund (that’s a group of 70 funds the state manages, including the general fund), as long as it doesn’t interfere with the programs that a fund supports. These loans are quickly repaid.
But managing the cash flow situation has been getting more and more challenging as the state’s budget picture has deteriorated. Policymakers have used up excess balances in special revenue accounts and drawn down the state’s budget reserve, gradually reducing the cash flow cushion in the state’s statutory general fund. Then, the sudden $1.2 billion budget deficit for the current biennium pushed our cash flow into a crisis. Soon, there won’t be enough resources in the state’s cash flow account, the budget reserve and the statutory general fund for MMB to cover our cash flow needs.
By April 2010, MMB is projecting that the statutory general fund (which is all 70 funds, including the general fund) will be facing a negative balance of $150 million. Combine that $150 negative balance with the $400 minimum balance MMB needs to cover the state’s basic expenses, and the state will need about $550 million in order to meet our cash flow needs this spring.
The report outlined some specific solutions for solving the April cash flow dilemma:
- A quick legislative solution to the state’s $1.2 billion deficit could help – particularly if it accelerates revenue collections or reduces expenditures. But a budget solution will probably not be enough.
- MMB can delay payments – a power they have already exercised. Last fall, MMB realized the state would be facing a negative cash flow situation in November. Starting in October, the state delayed $140 million in corporate and sales tax refund payments to manage the problem. The refunds were sent out in December.
The report detailed four possible payment delays (these do not require legislative approval):
- Up to $90 million in payments to the University of Minnesota for up to 60 days. The legislature would need to approve payment of interest on the delayed payments.
- Up to $60 million in corporate income tax and sales tax refunds for up to 80 days. The state has 90 days to pay these refunds, so it would not have to pay interest.
- Up to an estimated $950 million in individual income tax refunds for two weeks. The state has 90 days to pay these refunds, so it would not have to pay interest.
- Up to $925 million in school aid payments. The report says, however, that a more realistic amount would be $250-500 million.
Unfortunately, our cash flow problems don’t end this April. MMB projects that we will have a negative cash flow situation nearly every month in FY 2011. The state might need to borrow more than $1 billion over the course of the fiscal year to ensure we have sufficient cash on hand. To address this, the report outlines some long-term cash management options to better balance the flow of our revenues and expenses within a month (most of these do require legislative approval):
- Accelerate individual income tax collections. The state would change withholding tables to collect more taxes in the first half of the calendar year (when the state needs it most) and less in the second half of the calendar year.
- Accelerate sales tax payments by businesses with large sales tax collections.
- Have counties submit receipts from the statewide property tax to the state earlier than they currently do. Counties would lose out on the interest and could face cash flow troubles themselves.
- Permanently delay payments to the University of Minnesota and MNSCU from the beginning of the month to the 21st of the month.
- Deposit the revenues from the Health Impact Fee directly into the general fund. Right now, the Commissioner of Human Services needs to certify tobacco-related health care costs before funds are transferred to the general fund.
- Resort to short-term borrowing from an external market. A potential wrinkle: state law may actually require the delay of school aid payments before the state could consider external short-term borrowing.
One thing to remember, these cash management options are not budget cuts or accounting gimmicks – they are strategies to ensure the state’s day-to-day revenues and expenses match up. However, these actions can have negative impacts – including the loss of interest on investments or creating cash flow problems for others.