The state of Minnesota's financial picture looks so bleak that top officials are considering a rare move: Borrowing money to make sure the state can pay its bills next year.

Tom Hanson, commissioner of Minnesota Management and Budget, told a legislative subcommittee Thursday that the slow recovery could trigger general fund shortfalls in the spring significant enough to warrant short-term borrowing for the first time in a quarter-century. The state's tax collections are already $223 million lower than officials predicted.

Hanson said he wasn't sure how much the state might have to borrow, but state forecasters project a general fund deficit of about $1 billion for several months into next year. That estimate could worsen when the economic forecast is released early next month.

"This is a very serious situation," said DFL Senate Majority Leader Larry Pogemiller, who was in the Legislature the last time the state had to borrow money in the 1980s. "I've been in the Legislature many years, and this is the most foreboding situation I've ever been in."

Hanson said it's far from certain the state will need to borrow money, but he wants to figure out the best way to do it before the Legislature convenes in February.

It's better to plan for it now rather than react quickly or rashly to tanking tax revenue next spring, he said.

The problem is caused by the state's dwindling reserves and wild swings in tax collections versus expenses.

Tax collections brought in about $800 million in July, but the state paid out $1.6 billion. But in June 2010, the state expects to take in $2.2 billion and pay out $812 million. The state forecasts a general fund deficit in 10 of 12 months.

The state maintains a cash flow account of $350 million, but that may not be enough. Much of the state's other budget reserves were wiped out dealing with last year's shortfalls.

The state has several options for short-term loans, ranging from a negotiated line of credit to selling certificates of indebtedness through the state Board of Investment.

"We're in trouble," said state Sen. James Metzen, DFL-South St. Paul. "It's kind of scary."

Big loans, big interest

In the early 1980s, the state borrowed $1.66 billion over four years, which ultimately socked taxpayers with $124.2 million in interest payments.

At that time, "there was a much greater recognition that there was a problem and that we needed a balanced solution for it," Pogemiller said, referring to tax increases passed at the time.

Pogemiller sees the state's financial hardship as a longer term problem, not cured with short-term loans.

Gov. Tim Pawlenty and lawmakers need to make structural changes to the budget that could include cutting costs and raising revenue, Pogemiller said. "What we need is the political will to address it."

It's unclear whether Pawlenty needs legislative approval to borrow the money.

Either way, "We'd definitely go before the Legislature before borrowing authority would be used," said Jim Schowalter, state budget director.

News of the possible borrowing is the second recent sign of the depths of Minnesota's economic hardship.

The Minnesota Department of Revenue has delayed corporate and sales tax refunds twice in the last six months. To deal with cash flow challenges, the state is delaying payment of $128 million in corporate refunds and $16 million in sales tax refunds to about 750 customers until the end of the year.

To Rep. Lyndon Carlson, DFL-Crystal, the co-chairman of the subcommittee, it's starting to look a lot like the early 1980s again.

Gripped by a deep recession then, the state borrowed money to pay bills. It also cut programs, raised taxes, delayed tax payments and even slowed payments to vendors.

So far, Carlson said, he hasn't heard anybody suggest delaying payments to vendors.

Baird Helgeson • 651-222-1288