Continued: With budget hit on horizon, state builds cash cushion

State revenue collections are running ahead of expectations, giving the state a bit of a cushion to help absorb a severe economic shock that's on the way.

Although tax collections beat projections by $449 million since the spring, a longer-term projected deficit of $940 million may be greeting legislators when they return to St. Paul in January, state finance officials said Friday. Anticipated inflation may increase that problem to as much as $2 billion.

More immediately, the paralyzed credit markets are causing officials to rethink plans to sell $443 million worth of construction bonds, although they said no projects would be delayed.

"This is all very troubling, and we're really in uncharted territory," state economist Tom Stinson said at the Finance Department's quarterly economic update. "I have confidence that the Federal Reserve and Treasury can get a handle on what's going on. The problem is ... the institutions for global financial markets may not be sufficient."

The department's report said the United States is entering what could be the most severe recession in a quarter century. Stinson said, however, that while the downturn could be as serious as the recession of the 1980s, it is unlikely to be anything like the Great Depression in terms of duration or decline.

Evidence of the slowing economy was reflected in the sales tax revenue over the past three months: $20.1 million less than anticipated.

The state had been preparing to sell $443 million in general obligation bonds -- which fund projects for institutions such as the Minnesota Department of Natural Resources and the University of Minnesota -- in a matter of weeks.

"We're monitoring whether conditions will affect our willingness to enter the municipal bond market, and we will make our decision as it proceeds," said Kathy Kardell, assistant commissioner of the Minnesota Department of Finance. If the market is "as it stands today at the close of business, we will not proceed."

Capital project spending is not contingent on bonds, Kardell said. Those projects could then be funded through the state's cash reserves or the $200 million in proceeds from a summer bond sale for capital projects, Kardell said.

It's not all bad news, said Department of Finance Commissioner Tom Hanson. The state's reserves will provide temporary protection.

He said Minnesota has enough cash so that it doesn't have to turn to the credit market for short-term borrowing to make payroll or other immediate expenses. The last time Minnesota resorted to short-term borrowing was in the 1980s.

However, the cash cushion won't last long.

"We will be challenged to pay for the spending we're already doing," Hanson said. "Any new initiatives or new spending will probably have to be rethought. Or we'll have to find a way to pay for them."

The financial sector accounts for about 6 percent of total state employment, but it accounted for 9 percent of total state wages in 2007, because pay (including bonuses) for those workers is significantly higher than the statewide average. Layoffs and even bonus reductions in the financial sector would have an impact on state income tax collections.

Abby Simons • 612-673-4921

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