Surplus offers hope for Minnesota schools and communities

December 1, 2011

Nobody expected this morning’s good news – that the State of Minnesota is projecting an $876 million surplus for the current two-year budget cycle (FY 2012-13). This gives the state the chance to take positive steps toward keeping our promise to our kids and protecting vital investments in our economy.

While it’s nice to have good news for a change, it is short-lived. The November 2011 Economic Forecast projects a $1.3 billion shortfall for the next budget cycle (the FY 2014-15 biennium), or $2.6 billion if we include the impact of inflation. So policymakers must be careful how they use these one-time resources. In the face of serious economic hard times in the last few years, lawmakers have depleted most of the state’s rainy day resources and resorted to significant borrowing, including from our schools. The best thing we can do is to start reversing some of those actions.

Fortunately, that is exactly what will happen with this surplus. As required by state law, the first $255 million of the projected surplus will be used to refill the state’s cash flow account and the remaining $621 million will go to refilling the state’s budget reserve close to its target of $653 million.

That is good news for Minnesota’s schools, because it brings us closer to making good on the state’s promise to pay back what it borrowed from our schools. After the state’s cash flow and budget reserves are refilled, by law, any future surplus will be used to start buying back the school payment shift.

Unfortunately, the slow economic recovery means the state is projected to face deficits again. Using the current surplus to rebuild our rainy day funds will allow us to avoid deep cuts to areas vital to our future economic success – like education and training for Minnesotans of all ages.

Decisions being made at the federal level pose an additional threat for Minnesota’s economic future. The November Forecast assumes that Congress will extend the payroll tax cut and unemployment insurance benefits that expire at the end of this year. If Congress fails to do so, we face the serious risk of another national recession. Furthermore, federal deficit reduction could result in the loss of federal funding for health care, education, and other community services are the critical for Minnesota’s future prosperity.

Although some may float the idea of using the surplus for other purposes, policymakers will be wise to stay the course and refill our rainy day funds to position us to weather the storms on the horizon.

You can get all the details on the November Forecast on the Minnesota Management and Budget website.

-Christina Wessel

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A closer look at the cash flow crisis

January 22, 2010

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.

-Christina Wessel

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State’s budget reserve should be at $1.3 billion

January 21, 2010

The Minnesota Budget Project has long joined with other experts (such as the state’s Council of Economic Advisors and the State Budget Trend Study Commission) in arguing that the state needs a more robust budget reserve to help us through economic downturns.

Last week Minnesota Management and Budget released a report advising that the state would need a budget reserve of $1.3 billion for the current biennium to adequately prepare us for short-term fluctuations in the state’s volatile revenue streams. That’s equal to about 3.9 percent of last biennium’s expenditures.

Unfortunately, we are nowhere near that goal.

  • The state’s budget reserve is currently at zero. The Governor was required to use up the last $155 million in the reserve when he unallotted in December 2008.
  • The state’s cash flow account (currently at $350 million) should not count towards the budget reserve target. As recent news shows, we need the cash flow account to meet cash flow needs.
  • Even if we were enjoying a surplus right now, state law effectively caps the state’s budget reserve at $653 million (which is just 1.9 percent of last’s biennium’s expenditures).

Clearly, we are in no position to be building a budget reserve right now. Hopefully, however, the economy will turn around and the state will once again experience budget surpluses. When those days return, it should be a high priority for the state to fill the state’s budget reserve to an appropriate level.

Fortunately, a new state law requires MMB to provide a recommended level for the state’s budget reserve every January. And to help things out, policymakers could change the current cap on the state budget reserve so that future surpluses could be directed towards building the budget reserve to a more responsible level.

-Christina Wessel

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