Needing to borrow money to pay one's regular bills is a sign of serious financial trouble, whether "one" is a household or a state.
Minnesota is back in that predicament for the first time in 27 years. Come April, state finance officials say they'll be $143 million short of the cash needed to pay scheduled obligations, with zero funds on hand to cover routine variations in state bills. (Normally, a $400 million cash cushion is needed for that purpose.) What's more, they add, the cash-flow red ink in 2011 looks like it will be deeper.
Count this as another sign of how severely the Great Recession is battering this and other state governments. With their mix of income and sales tax revenues and safety-net spending obligations, state budgets around the country are being hammered right now.
But also count it as a marker of neglect of some government finance basics. Minnesota has been plagued with recurring state deficits ever since it cut taxes deeply during the dot.com bubble of 1999-2001, without reining in spending. A panel of economists reviewing the state budget in 2009 traced the state's money woes to those decisions, almost as much as to two intervening recessions.
For two decades, the state has kept a cash-flow account to get through the ebb in cash reserves each tax refund season brings -- held static at $350 million. Inflation has been allowed to erode its effectiveness. Meanwhile, the state's reserve fund balance stands at zero. It was drained in 2008. Economists' recommendations that those two fiscal cushions be larger have been ignored by lawmakers for years.
Enlarging those two funds now is not politically possible -- and doing so in time to avert this spring's cash trouble is not practically possible. Even if spending cuts and/or tax increases could be enacted, they could not be implemented quickly enough to do the job. Getting through the 2010 cash drought in a way that minimizes lasting damage, and then taking permanent steps to stabilize the state's cash position in 2011 and beyond, is all the 2010 Legislature and Gov. Tim Pawlenty can do -- and is what they must do.
State statutes spell out how previous elected officials believed a cash-flow crisis should be mitigated. A never-exercised statute dating from the early 1990s directs that payments be delayed to those school districts that have sufficient positive balances in their accounts. It requires that the delay be brief, with accounts fully paid by June 30. In other words, the law treats school districts like the creatures of state government that they in fact are. About 75 percent of a typical school district's resources flow from state government; how much districts can receive from local taxpayers is regulated by the state. That means school surplus funds aren't greatly different from surpluses that might appear in the accounts of a state agency.
School districts are understandably displeased with the likelihood that this law will be triggered. They decry its selective impact, in effect punishing those that have been able to keep their books in the black. They ask a question worth examining: Why is it more desirable for 100 or more school districts to draw down their reserves, possibly creating their own cash-flow crises, than for the state to borrow to cover its cash-flow needs?
