State may face cash flow problems and other news

On Thursday morning, the Subcommittee on a Balanced Budget met again to discuss the state’s fiscal health and the upcoming legislative session. The hearing highlighted some interesting information. (You can also read our blog on the first meeting.)

Start paying attention to the state’s cash flow situation. The balance in the state’s “statutory general fund” (that’s basically most of the state’s funds all lumped together) can swing by $1 billion over the course of the month, depending on the timing of revenues flowing in and payments flowing out. That’s nothing new. What’s not so normal is that the overall balance of the state’s statutory general fund is trending downwards. At the moment, Commissioner of Minnesota Management and Budget (MMB) Tom Hanson describes the situation as “manageable”. However, if the November Forecast reveals more fiscal trouble, the state may need to resort to short-term outside borrowing by next spring in order to cover cash flow needs. Signs suggest that we are headed in that direction – right now the state’s revenue collections for FY 2009 and 2010 are $223 million below projections. The November Forecast (to be released December 2) will give us a clearer picture of the state’s cash flow situation and the Governor will be making recommendations next session for how we can approach the problem. However, Jim Schowalter (MMB’s Budget Director) points out that this isn’t just a matter of shifting the timing of payments; there is a long-unaddressed structural problem here.

State agencies have their instructions for 2010 Legislative Session. As the executive branch puts together its supplemental budget proposal, Commissioner Hanson has told state agencies that they should only be submitting emergency/deficiency items, specific initiatives proposed by the governor or new savings opportunities. In committee on Thursday, it was mentioned that the state’s higher education grant program potentially faces a deficiency of about $13 million and there has been increased demand in MinnesotaCare.

Resolving future deficits through spending reductions would force huge cuts. Lead fiscal staff in the House and Senate have put together a budget calculator that allows policymakers to see what it might take to balance the state’s budget. The results are sobering. The latest information from MMB projects a $4.4 billion budget deficit for the FY 2012-13 biennium. If policymakers were to resolve this deficit entirely through proportionate reductions and started implementing the cuts immediately in order to get a head start on the problem, every area of the budget would need to be cut by 9.4 percent in FY 2011, 2012 and 2013.  If K-12 education were held harmless, then percentage reductions for the other areas of the budget would increase to 15.7 percent.

The size of the deficit, however, could grow to as much as $7.25 billion if a variety of other factors are included. In that case, every area of the budget would need to be cut by 15.5 percent in FY 2011, 2012 and 2013 to balance the budget. Staff didn’t prepare a scenario showing what would happen if K-12 education was held harmless.

If we don’t start trying to solve the deficit in FY 2011, the percentages are even higher.

After years of budget deficits and spending cuts, an additional 9 percent cut – or more – would seriously jeopardize the state’s ability to maintain adequate funding for basic services including education, health care and services for people with disabilities. This is not a sustainable trend if Minnesota intends to remain an “above average” state. Raising revenues must be part of the solution to the FY 2012-13 budget deficit.

-Christina Wessel

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About Christina Wessel

Christina served as the Minnesota Budget Project's deputy director until January 2014.
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