The last time Minnesota had to borrow money to pay its bills, taxpayers forked over millions in extra interest payments as the state sank into the financial doghouse for more than a decade.

Minnesota's envied credit rating -- and cheap borrowing rates -- could be in jeopardy again as state finance officials consider borrowing money, this time to pay bills next spring and possibly through the 2011 fiscal year.

With the latest forecast projecting a $1.2 billion deficit for the remainder of the 2010-11 budget period, Minnesota joins a growing number of states that expect to be dangerously low on cash and might turn to banks and investors for the equivalent of payday loans.

That Minnesota is not alone in its financial turmoil hardly comforts those who remember watching the state toil for 16 years to regain its pristine credit rating in 1997.

"It's a bad sign," said former state Finance Commissioner Peggy Ingison, now chief financial officer with Minneapolis public schools. "It signals you didn't have good fiscal discipline."

State finance officials could know by this week how much they need, and say this time will be easier on taxpayers' wallets. The tanking economy has ushered in record low interest rates and made bond-rating agencies take a more charitable view of cash-strapped states that deal squarely with problems in tough times.

The state first tapped the private market during the recession in 1981, borrowing $150 million, costing taxpayers a relatively modest 1 percent in interest and fees. But the move at least partially triggered the erosion of the state's finances in the eyes of the nation's top credit-rating agencies.

Two years later, short-term borrowing jumped to $950 million, with fees and interest topping $82 million, about 8 percent of the amount borrowed.

By 1984, the state's total short-term borrowing hit $1.66 billion, costing taxpayers $124.2 million in interest payments and fees -- enough to build two Metrodomes, with millions to spare.

Taxpayers' pain didn't end there. When the state regained its top credit rating in 1997, state officials figured the taxpayers paid an extra $1 million in interest for every $1 billion in bonds issued during the life of the debt.

Kathy Kardell, an assistant commissioner in the Minnesota Management & Budget Department, said that by February she hopes to have either a short-term line of credit from a bank or a loan from major investors.

Experts say the state could see six-month interest rates as low as a half-percent. The Federal Reserve has driven rates down to near zero to keep money flowing and pull up the nose on the tanking economy, but financial experts expect rates to edge back up once the federal government declares the crisis over.

"If we never use it, hurray," Kardell said. "But we need to be prepared."

Exception or habit?

Still left unanswered is whether this would be a one-time cash infusion for a few months this spring or whether it will continue into 2011, a year in which the state forecasts even bigger cash-flow problems. The state must balance its budget by the end of the 2011 fiscal year.

"It's still scary," state Budget Director Jim Schowalter said last month. "I'm not underestimating that."

The need for short-term borrowing indicates the state needs to get better control of the lumpy budget cycle, said Ingison, the former finance commissioner.

"Governments totally control in-flow and out-flow of money," she said. "It's a big deal to be doing short-term borrowing. It's certainly not a good thing."

There are other tools to control cash flow, such as delaying payments to vendors and temporarily holding back corporate income and sales tax refunds. The state delayed about $140 million in tax refunds this year, payments finally scheduled to go out the door at the end of last week.

"You want to make sure you use all the tools you have," she said.

Gov. Tim Pawlenty's administration "is doing everything possible to avoid short-term borrowing," said Brian McClung, one of Pawlenty's deputy chiefs of staff.

Could the need to borrow tarnish the governor's legacy as a fiscal conservative? McClung doesn't think so.

"Minnesota continues to have the highest bond ratings in the region," he said. "Governor Pawlenty has balanced the budget four times without raising taxes and achieved the state's long-term, bipartisan goal of moving Minnesota out of the top 10 highest taxed states, even as we faced the most difficult economy since pre-World War II."

'Proactive' steps favored

In 1992, the state took steps to even out its sometimes tumultuous cycle of revenue and expenses. Minnesota shifted local government aid payouts, revised payments to the University of Minnesota and tweaked the due date for sales tax payments.

Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, said occasional short-term borrowing doesn't suggest reckless fiscal management. Some states do it routinely while waiting for tax collections to roll in.

"I'm not sure the need to borrow for short-term cash needs can be interpreted as a sign of weak financial management," he said. "In some ways, it can be argued that not paying one's bills is worse. Ensuring that bills are paid and payroll is met is a better way to manage during a significant economic downturn."

Analysts from the nation's three main credit-rating agencies are watching. The state holds the top bond rating from Standard & Poor's and Fitch Ratings. Moody's Investors Service dropped the state's bond rating one notch below its top rating in 2003.

Analysts wouldn't predict what could happen to the state's credit rating, but said they might become more concerned if the borrowing becomes routine.

Still, rating agencies view these as unusual times, with state tax revenues down sharply nationwide.

"Everybody is living in a different world now," said Kimberly Lyons, an analyst with Moody's.

"We give states credit for being proactive," she said. "We like to see states be prepared."

Former Gov. Al Quie was in office when the state first started short-term borrowing in the early 1980s.

"It's better than hurting people" through sudden cuts to programs, he said.

"I remember sitting there with my people saying, 'you can't just borrow it, you have to pay it back,'" Quie said. "You have to have a plan to make the state whole again."

So the state decided to tack on a temporary income tax surcharge to help pay off the debt, which drew some fiery criticism at the time.

Quie now summarizes that time this way: "When there's a serious illness in the family, you borrow," he said. "When that child survives, you forget all about it."

Baird Helgeson • 651-222-1288