The state’s cash position is as healthy as it has been in a long time. Budget solutions that rely on one-time cash reserves and creative budgeting to balance the budget could threaten the ability to effectively and efficiently manage cash flow throughout the year and maintain a strong credit rating.
FOR IMMEDIATE RELEASE
August 20, 2020
What we found:
- After a decade of economic growth and policies focused on shoring up the state’s fiscal health, including its cash flow, the cash position at the end of FY2019 was as strong as it had been for more than two decades.
- The state tax revenue losses arising from the current recession are creating short-term risks to the cash position.
- The approach state policymakers take to crafting FY2021 and FY2022 budgets will determine the long-term outlook for the state’s cash position. Policymakers will be forced to balance the goals of maintaining a strong cash position and crafting on-going, structurally sound balanced budgets in the coming years.
The Citizens Research Council has released a new report that examines how the COVID-19 recession is affecting the State of Michigan’s cash position and the risks to it. The COVID-19 Recession Imperils the State’s Cash Position looks at the poor cash management practices used during the state’s economic hardships at the beginning of the century and describes how the lessons learned at that time should apply to the current situation.
The legislative and executive branches will reconvene next week to update estimates of economic activity and tax receipts for the next year. The outcome of the August 24 Consensus Revenue Estimating Conference will set the revenue outlook for the Fiscal Year (FY)2021 state budget. Policymakers will then have to restart their efforts to address a projected multi-billion dollar state budget deficit before the new fiscal year starts on October 1.
“We’re all hopeful that a vaccine will be available soon and that will allow all sectors of the economy to reopen,” said Eric Lupher, President of the Citizens Research Council. “The hope that economic activity may soon return to pre-recession levels may increase the attractiveness of some budgetary gimmicks and other changes to minimize the number and depth of spending cuts to state-financed programs that may be needed. We’ve seen in the past how that kind of budgeting approach has created cash management issues.”
The state’s cash position reflects the balance of state funds at given points in time (it is usually measured monthly) throughout a fiscal year. It effectively shows the amount of “cash on hand” available to liquidate financial obligations arising from state appropriations. This is a core indicator of a state’s fiscal health.
It is important that governments have sufficient cash available to meet their obligations when they come due. The credit worthiness of governments is invariably tied to its ability to manage its cash flow effectively and efficiently. Thus, short-term efforts to minimize the pain of cuts could lead to long-term increases in the cost of operations.
“Positive policy actions over the past decade have put the state in a position wherein it is not at risk of an immediate cash shortfall; yet that does not mean policymakers should ignore considering how their actions could impact cash flow,” said Lupher. “As long as policymakers make responsible choices in response to the current economic downturn, Michigan should not be at risk of a cash deficit due to the recession.”
The COVID-19 Recession Imperils the State’s Cash Position may be downloaded here.