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


Bad news and really bad news about Minnesota’s financial situation

July 12, 2010

First, the bad news. Despite some optimism from the Governor at the end of the 2010 Legislative Session that the cash flow situation for FY 2011 was manageable, the latest news from Minnesota Management and Budget (MMB) shows that the state’s cash balance in the statutory general fund will dip to near zero as early as October. The cash balance will remain near or below zero until May. That’s clearly well below the minimum workable cash balance of $400 million.

The administration is proposing some options to help manage the cash flow situation which could be implemented as soon as this August. Recommendations include:

  • Deferring $83 million in K-12 payments until May 2011.
  • Deferring $89 million in payments to the University of Minnesota until June 2011.
  • Delaying $221 million in sales tax and corporate tax refunds over $5,000 by up to six months (all would be paid out by January 2011).
  • Delaying $110 million in payments to health plans and county-based health services in October and November (all would be paid by December 2010).

Unfortunately, these actions wouldn’t be sufficient to completely resolve the cash flow problem that persists through next spring. The state is also pursuing a line of credit option to help manage those shortfalls.

And now for the really bad news. The latest economic update released by Minnesota Management and Budget shows the state’s revenue collections for the current biennium are below expectations. We are closing FY 2010 (which ended on June 30) with a $99 million revenue shortfall. This shortage will be absorbed by the $6 million policymakers left on the bottom line and the $266 million in the cash flow account. As a result, there is no deficit for the current biennium. However, if there is another shortfall of more than $173 million before the end of FY 2011 (that’s what will be left in the cash flow account), then policymakers may need to solve another budget deficit before June 30th. (As a side note, the cash flow projections mentioned above take into account the $99 million shortfall.)

The future doesn’t look any rosier. Remember that the actions of the 2010 Legislative Session left the state with a $5.8 billion deficit for the FY 2012-13 biennium, $6.9 billion if you include inflation. Although the U.S. economy is showing consistent growth, the economic update points out that, “a crisis of confidence is emerging now as Americans begin to recognize how slow this recovery is likely to be.” Although most economists do not fear another recession, real GDP growth is now expected to average 2.9 percent over the next biennium, not the 3.5 percent initially projected. As a result, “it appears that the 2012-13 budget gap is likely to be materially wider than end-of-session estimates.”

State policymakers may soon be regretting that they did not take more action to reduce the FY 2012-13 deficit during the last legislative session. A slim ray of hope could come from the federal government. Congress has been debating for months whether to provide states with additional fiscal relief. This latest financial news clearly shows that the crisis in the states continues and federal assistance is critical to preserving core public services and sustaining economic growth.

-Christina Wessel

House and Senate present a plan to resolve budget gap

May 10, 2010

As the legislative session draws to a close, the recent State Supreme Court decision overturning the Governor’s unallotment actions has added a new twist for policymakers. Monday morning, the House and Senate announced a proposal that would fix a $2.962 billion hole – $535 million needed to fix the state’s remaining budget deficit and another $2.4 billion to preemptively deal with the uncertainties resulting from the State Supreme Court decision.

The proposal (HF 2037) ratifies most of the Governor’s unallotments (including the shift in K-12 education payments), includes $435 million in new revenues and adopts some fixes for helping easing imbalances in the state’s cash flow.

The details of the proposal include (a spreadsheet is available):

  • $1.75 billion from ratifying the Governor’s shift in education payments
  • $21 million from approving some of the Governor’s unallotments and recommended reductions to state agencies (these would be permanent reductions)
  • $293 million from ratifying the Governor’s local government aid unallotments in FY 2010-11
  • $52 million from ratifying the Governor’s unallotment of the Renters’ Credit for low-income families in FY 2010-11 only
  • $19 million from ratifying other tax aids and credits the Governor unallotted in FY 2010-11 (including the political contribution refund program)
  • $100 million from ratifying the Governor’s unallotments to higher education in FY 2010-11
  • $114 million from the health and human services conference committee agreement (this is traveling in a separate bill, not HF 2037)
  • $74 million from ratifying some of the Governor’s unallotments to health and human services in FY 2010 (additional unallotment actions are included in the health and human services conference committee agreement)
  • An additional $77 million in reductions to health and human services in FY 2011 that would be implemented if the state does not receive the federal enhanced Medicaid funds
  • $40 million from the Closed Landfill Investment Fund
  • $435 million in new revenues (about 15 percent of the solution). The bill would create a new 4th tier income tax rate, increasing the rate for married couples with taxable income over $200,000 from 7.85 percent to 9.1 percent. If the state attains a surplus of at least $500 million in the February 2013 forecast, the rate would return to 7.85 percent in 2014. Another provision would also accelerate the expiration of several federal tax cuts that are set to expire next year.

This proposal assumes the state will not receive $408 million in federal money from Congressional action to extend increased federal funding for health care under Medicaid. The bill does include contingency language so that if the resources arrive by June 15, 2010, $77 million in reductions to health and human service would not be implemented and $36 million would be used to fill a hole in financial aid for higher education. The remainder would be used to begin to pay back the school shift and help with the state’s cash flow problems (this part was not clearly explained). Representative Carlson placed the probability of receiving the funds at 80 percent.

The bill also includes language recommended by the Governor that would help ease the state’s cash flow challenges by shifting when the state receives some revenues.

Both the Senate and House are expected to take up the bill on the floor today. Watch the blog for more analysis…

-Christina Wessel (with lots of support from the rest of the amazing Minnesota Budget Project staff!)

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Legislative Session nears end: Where does the budget stand?

May 6, 2010

With less than two weeks left in the 2010 Legislative Session, policymakers are facing some very significant challenges. So, it seems like a good time to review where we are at.

To date, the legislature has resolved $459 million of the state’s projected $994 million deficit for FY 2010-11. The major components are a $312 million omnibus supplemental budget bill and $147 million in savings from the General Assistance Medical Care compromise. Currently, both the House and Senate are moving a K-12 omnibus bill and a health and human services omnibus bill as part of their plan to balance the budget.

But there are two important wild cards facing policymakers this year.

  • First, in their budget proposals, the Governor and House have been counting on $408 million from the federal government in an extended enhanced Medicaid matching rate to help solve a major portion of the $994 million budget deficit. These funds would prevent Minnesotans from losing access to health care during these tough times. Currently, Congress is expected to pass the extension later this month as part of legislation extending unemployment benefits. However, the action would come after the legislative session has ended – and there is the possibility that it may not pass at all.
  • Second, the State Supreme Court’s unallotment decision has reversed the Governor’s unallotment of a special diet program, at a cost of approximately $5 million. However, there is the possibility that the decision could reverse all of the Governor’s unallotment actions. If that’s the case, policymakers could be faced with a $700 million problem. Why not the full $2.7 billion in unallotments? Well, $1.8 billion can be saved by ratifying the Governor’s shift in education spending – the House already has that provision in their K-12 omnibus bill. Then there is another roughly $200 million that the Governor has the administrative authority to implement outside of unallotment. That would leave $700 million in question.

So, does all this need to be figured out before the legislature adjourns on May 17th? Technically, no. Our Constitution requires that we have a balanced budget by the end of the biennium, so policymakers have until June 30, 2011 to figure it all out. And with the Governor’s unallotment threat removed, he has lost a powerful tool to force a resolution.

However, that doesn’t mean it’s fiscally responsible, or even fiscally feasible, to leave all of these issues unresolved until the next legislative session begins.

Why not? First, the budget clock is ticking. The longer we wait, the more money has gone out the door, leaving less money to cut from and less time to bring in new revenues. In other words, a long delay could result in fewer choices and more drastic budget decisions.

Second, the state has a cash flow problem – meaning when we collect revenues doesn’t always coincide with when we need to write checks. Current projections suggest that the state is heading towards a cash flow crisis, when we will not have enough cash in the bank to pay our bills on time nearly every month starting this September. If we leave a large unresolved deficit, it is more likely that we will need to turn to short-term borrowing from an outside source to help our cash flow.

Timely action is important, but that doesn’t mean all of these issues must be addressed before the session ends. For example, it makes sense to wait and see if Congress passes the Medicaid extension. However, it would be responsible to have a plan in place in case the funds do not materialize by an agreed upon date.

Moreover, it is important that any legislation reflect a balanced approach and an open process.

Whether the Medicaid funds fall through, or the Governor’s unallotments are overturned, the situation just underscores the need to put revenues on the table. If we face a worst-case scenario, resolving the deficit entirely through budget reductions would require brutal cuts to health care for vulnerable citizens, services for people with disabilities, supports that help Minnesotans get and keep jobs, and many other critical areas. These cuts would hit families just as they are struggling to emerge from a deep recession and they would place our state at a competitive disadvantage. We have recently published a report that examines different revenue options and how much they would raise.

The decision-making process must also be an open one. However policymakers ultimately resolve the state’s deficit, the public must have the opportunity to hear the proposals and provide input. A few leaders making decisions behind closed doors may seem expedient, but it also leaves hundreds of thousands of Minnesotans without a voice.

-Christina Wessel

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State averts short-term borrowing…for now

April 14, 2010

The state of Minnesota will not have to resort to short-term borrowing to address cash flow shortages this fiscal year (which ends on June 30), but the picture for the state’s next fiscal year remains troublesome. The state’s current cash flow situation is looking better than previously projected, but the balance in the state’s statutory general fund is still projected to fall below zero by September, and stay below zero until June 2011. The state historically has faced volatility in its cash flow because of the timing of when the state receives money (such as quarterly income tax filings) and when it spends the money (such as school aid payments).

Jim Schowalter, deputy commissioner of Minnesota Management & Budget (MMB) and Charlie Bieleck, executive budget coordinator, presented the latest cash flow data Monday morning at the Legislative Commission on Planning and Fiscal Policy Subcommittee on a Balanced Budget.

When assessing the state’s cash flow situation, MMB looks at the available resources with the “statutory general fund,” a group of 70 funds the state manages that includes the general fund, the Health Care Access Fund and many other smaller funds. The state can shift money between these accounts as needed to cover short-term cash flow shortages in the general fund.

Much of Monday’s news was similar to an earlier MMB presentation. Here are some key points about this spring’s cash-flow challenges:

  • Normally, borrowing from other accounts within the statutory general fund is sufficient to handle cash flow issues in the state’s general fund. As of April 6, MMB has had to borrow nearly $1.1 billion from other statutory general fund accounts in order to cover expenses in the general fund. This money will be repaid to these funds by June 30, the last day of the fiscal year.
  • This spring, inter-fund borrowing was not sufficient to cover the state’s cash flow needs. An additional $400 million was found by delaying $337 million in payments to K-12 school districts, $52 million in payments to the University of Minnesota, and $26 million in corporate and sales tax refunds. The state expects to delay another $83 million in payments to K-12 school districts in April. All of these delayed payments and refunds will be paid out before the end of the fiscal year.
  • Even with these actions, the state’s general fund balance was just $239 million as of April 6, well below the $400 million cushion MMB prefers to have.

The state’s cash flow situation gets much worse in FY 2011, which begins on July 1. The statutory general fund is projected to fall below zero every month beginning in September. That scenario would very likely lead the state to turn to short-term borrowing from an outside source to help the state meet its financial obligations. However, there are a few variables that could impact the cash flow picture:

  • It is important to note that MMB’s projections for FY 2011 do not take into account any budget decisions from this session – including the first-phase budget fix the legislature recently passed. Schowalter said that actions to solve the state’s $1 billion deficit will help to ease, although not resolve, the state’s cash flow problems.
  • An improving economy could also help the cash flow situation, although a double-dip recession would make things considerably worse.
  • A more permanent improvement would be to change the timing of when revenues flow in and payments flow out. We recently blogged about a bill being proposed by the Pawlenty administration to do just that. Once again, this could help, but still wouldn’t solve the state’s cash flow troubles.

-Scott Russell and Christina Wessel

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Cash flow problems spark proposed changes in payments

April 1, 2010

While the debates over GAMC and budget bills have taken prominence this session, the state’s cash flow problems haven’t gone away. Last Friday, the House Finance Committee heard a bill that would attempt to ease the cash flow crunch.

The bill, HF 3741, includes three provisions that would help to shift state revenues and expenditures around to help timing issues:

  1. Delay payments to the University of Minnesota. Currently, the U of M gets their annual appropriation divided into monthly payments on the 21st of each month. The bill would delay the payments until the 25th – allowing a little extra time for sales tax revenues to come in.
  2. Accelerate statewide property tax payments from counties. The counties collect this tax, and then pay a portion to school districts and a portion to the state. The bill would change the payment schedule so that the state gets its share at the same time that school districts are paid – which would be earlier than under current law.
  3. Accelerate monthly sales tax payments. Currently, vendors that collect the sales tax are required to submit sales tax payments to the state on the 20th of the month. The bill would require businesses (only those with more than $120,000 or more in sales tax liability in a year) to pay 90 percent of their estimated sales tax liability on the 14th of the month. The remaining 10 percent would be paid on the 20th as usual.

These changes would be permanent to help the state out with the even larger cash flow problems that await us in the next biennium. Not surprisingly, the bill is already sparking some controversy. The next stop is the House Tax Committee sometime after the Easter/Passover recess.

-Christina Wessel

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Governor fine tunes his supplemental budget

March 25, 2010

Governor Tim Pawlenty has made the final adjustments to his 2010-11 Supplemental Budget, based on the state’s most recent economic forecast. There are no big changes.

Each year, after the February forecast, the administration submits two kinds of changes to their budget proposal.

  1. Minnesota Management and Budget (MMB) re-prices certain proposals where the February Forecast provides more current information. For instance, the state has new caseload estimates to update health and human services estimates, and it has new estimates on K-12 pupils and can update projected education spending. Most of the changes are in this first category.
  2. The Governor makes changes to respond to the updated deficit/surplus figure, so that his budget proposal is still in balance (if needed). The state’s FY 2010-11 budget deficit dropped from $1.2 billion to $1 billion in the February forecast.  Despite the improved financial position, the Governor did not take any proposed cuts off the table. He recommends putting the additional $209 million into the state’s overworked cash flow account.

Many of the budget changes are relatively small. For instance, the Governor’s original Supplemental Budget recommended cutting local government aids $250 million. After the update, that cut was reduced $151,000 to $249,849,000.

Examples of budget changes include the following:

  • The estimated amount of general fund savings the state could get from an extension of an increased federal matching rate for Medicaid state is now $408 million. That’s $21 million more than initially forecast (and this funding is still anticipatory, Congress has not approved the extension yet).
  • The General Fund will transfer $12 million less to the Health Care Access Fund in FY 2011 ($99 million instead of $111 million).
  • The education savings projected from making permanent the property tax recognition shift, part of the Governor’s unallotment, was reduced $2.6 million.
  • A new proposal exempts school districts with operating deficits from the state’s school aid payment shift. It has no costs this biennium, but will cost the state an estimated $3.8 million in FY 2012.
  • The state will get $1.3 million less savings from the Governor’s proposal to cut chemical dependency treatment provider rates five percent.

To MMB’s credit, staff made it easier for readers to identify changes. On the online budget pages, it has highlighted changes in yellow and purple. (Note: The color isn’t important. MMB made the revisions in stages. The yellow was used for the first round of changes and the purple was used for the second round.)

-Scott Russell

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