State may force schools to lend it $1B

In a sign of the gravity of the state's fiscal crisis, Minnesota budget officials may force public school districts to loan the state money so that it can continue paying its bills.

Gov. Tim Pawlenty's administration could withhold nearly $1 billion in state aid payments to public schools through May, to ensure the state's checkbook doesn't run dry, under a plan unveiled Wednesday at a legislative committee meeting.

The state already has the legal authority to do so, although it has never exercised it.

The plan, one of several under consideration, would tap the reserves of school districts that managed to build up rainy-day funds. The state burned through its reserves last year as it faced multibillion-dollar deficits.

In a worst-case scenario, the Minneapolis Public School District could lose more than $95 million in state aid over the next several months. The Rosemount, Eagan, Apple Valley district could lose more than $50 million. State budget officials said the money would be repaid in June -- without any interest -- when tax revenue refills state coffers.

Minnesota Management and Budget Commissioner Tom Hanson said that delaying the payments could eliminate the need to borrow money from banks or large investors this fiscal year, a move that could tarnish the state's credit rating. Still, state leaders want to have a loan in place by March in case the state runs low on money, he said.

State Rep. Mindy Greiling, DFL-Roseville, said school districts that showed fiscal prudence by building reserves will be punished by a state that didn't exercise the same discipline.

"It's a slap in the face for being fiscally responsible," said Greiling, chairwoman of the House K-12 Finance Division.

Minneapolis Public Schools might be forced to borrow money itself if the state delays payments more than a month or two, said Peggy Ingison, the district's chief financial officer and a former state finance commissioner.

The district uses its reserves to manage cash flow, much in the way the state does. The $90 million reserve fund is already subjected to volatility from fluctuating state funding levels and pension obligations.

"To me, it's another bad signal that the state hasn't managed its problems, and we are going to get nicked again," Ingison said.

School officials said they fear the lost payments will become permanent as lawmakers and the governor wrestle with a $1.2 billion shortfall projected through the remainder of the fiscal biennium.

State budget officials figure they'll need about $550 million either in delayed payments or private loans to get them through the rough patch this spring.

Wild cash swings

The cash-flow crisis is caused by wild swings in tax collections and expenses, which can yo-yo more than $1.5 billion dollars in a single month. In the past, the state has propped up the low points with reserves and by shifting money from various state funds. Now those accounts are tapped out.

No decision has been made on whether to delay the school payments or by how much, Hanson said. A cash-flow report is due Friday, and a final plan to deal with the expected cash shortage will be decided in coming weeks.

This would be the first time the state delayed payments to schools to manage cash flow. It first gained the tool in 1986, several years after the state experienced similar cash shortages stemming from the recession of the early 1980s. At that time, the state resorted to private borrowing that sent its credit rating plummeting.

"Long term, it's disastrous," Carlson said. "It's a delayed tax increase. Postponement is not leadership."

School officials who hope the delayed payments would be a one-time event won't find much solace in 2011, which now looks even worse.

As it stands, "that is an unmanageable situation," state budget director Jim Schowalter said.