It’s no surprise to hear that the state will be facing a cash flow problem this spring…but now we know how the administration will be handling the situation. Earlier this week, Jim Schowalter, the State Budget Director, presented the plan to the Legislative Advisory Committee.
The state’s cash flow problems for this fiscal year (FY 2010) are projected to peak in March, April and May. In order to ensure that the state has sufficient funds to cover expenses during these months, Minnesota Management and Budget (MMB) will exercise its authority to:
- Delay $423 million in payments to school districts in March and April (will be paid out by end of May)
- Delay $60 million in corporate and sales tax refunds (will be delayed in February, March and April and paid out in May and June)
- Delay the March monthly payment of $52 million to the University of Minnesota (will be paid out in May)
Unfortunately, the state’s cash flow problems don’t end in FY 2010. The situation is actually worse in FY 2011 – when the cash flow deficit could reach $1.7 billion. In anticipation of the problem, MMB has issued a request for proposals (RFP) for short-term borrowing from an outside source. (This tool could also be used to manage the cash flow situation in the current fiscal year, but MMB expects that the payment delays outlined above should be sufficient.)
Some of the key elements of the short-term borrowing RFP:
- The state is considering either a line of credit and/or a private placement to a large “sophisticated” investor (most likely an institution).
- The amount is not to exceed $600 million.
- The short-term loan would be repaid from resources in the general fund (and it would have to be repaid by June 30, 2011, the end of the fiscal year). However, the loan is secured by the “state’s full faith, credit and taxing power,” meaning the state would have to a levy a tax to repay the loan if there aren’t sufficient general fund resources available.
- The RFP was issued on Thursday, February 4 and proposals are due on February 25.
A couple of caveats. MMB stressed that this RFP is intended to research the possibility of engaging in short-term borrowing – it does not commit the state to pursuing this option. Also, it’s important to note that before the state could engage in short-term borrowing, MMB is required under current law to delay payments to schools to the maximum allowable level – about $900 million.
-Christina Wessel
