Budget Brief: Cash Flow Woes Continue in 2009-10

Thursday, January 28, 2010

The Department of Finance and the Controller’s Office have provided updated cash flow projections for 2009-10. Absent enactment of special session solutions, the Department of Finance projects that the state’s General Fund cash cushion would drop to $1.1 billion in March 2010 (which is $1.4 billion short of the Controller’s ideal cash cushion of $2.5 billion). However, the Controller’s Office is quick to point out that while the end-of-month balance for April is positive (approximately $7.5 billion), General Fund cash will be negative early in the month (-$197 million) as a result of significant disbursements on April 1.

This cash problem is much shallower in depth and shorter in duration than the State’s cash problems in the spring of 2009. Nonetheless, there appears to be a need for legislative action in the current year to prevent a negative cash balance in April 2010. On January 8, 2010 the Governor issued a Fiscal Emergency Proclamation and an Extraordinary Session Proclamation to address the state’s budget shortfall and current year cash situation.

Regarding cash, the Governor's Budget includes $1 billion of cash solutions in March 2010, but provides no detail regarding how this solution would be achieved. In previous years, cash solutions have included personal income tax withholding changes, corporate tax estimated payment changes, revised disbursement schedules for education, health and human services, and increased borrowable resources in the state treasury.

In addition to the $1 billion cash “solution,” the Governor’s Budget proposes $1.2 billion of current year, special session budget solutions, which are projected to grow to $7.7 billion in the budget year. Though cash solutions do not help solve the budget deficit, budget solutions enacted during the special session will have a positive impact on the state’s cash situation in both the current and budget years.

Conclusion: The Legislature needs to act quickly to enact both cash and budget solutions as part of the special session. Enacting budget and cash solutions in February will maximize the value of solutions over the next 18 months and minimize the chance that the Controller will resort to delaying vendor payments, delaying tax refunds, or issuing registered warrants (IOUs) in early April.