U.S. PUBLIC FINANCE
3 JULY 3, 2012 SPECIAL COMMENT: TREND OF ON TIME STATE BUDGETS CONTINUES AS REVENUES IMPROVE
No Government Shutdowns for Fiscal 2013
Underscoring how the resolution of significant budget shortfalls can heighten ideological differencesand lead to political stalemate, the Minnesota government shutdown for 20 days at the start of fiscal2012, the longest state shutdown in recent history (Exhibit 2). During the 2011 legislative session,Governor Mark Dayton's original executive budget recommendation included new taxes forecasted togenerate approximately $3 billion of recurring revenues. Disagreement over the proposed new taxes forthe fiscal 2012-2013 biennium resulted in a budget impasse, with the state legislature staunchly againstany additional taxes. The state failed to enact a new biennium budget in time for fiscal 2012,prompting an immediate shutdown of government operations pursuant to statute, which prohibitedthe state from spending without a legislatively approved budget.
Debt service was not affected:mechanisms were put in place to ensure that all of the state’s bonds continued to be paid on time.
Only a handful of State Shutdowns – Last Ten Years
State G.O. Debt Rating Length of Shutdown Year of Shutdown
Michigan Aa2/Stable 2 hours 2007Michigan Aa2/Stable 4 hours 2009Pennsylvania Aa1/Negative 1 day 2007New Jersey Aa3/Stable 7 days 2006Minnesota Aa1/Negative 8 days 2005Minnesota Aa1/Negative 20 days 2011
Source: Moody’s Investor Service
Established Procedures Ensure Timely Debt Service Payments in Late BudgetSituations
While many states have mechanisms to ensure timely debt service and maintenance of operations inthe event of late budget adoption, some states have no established contingency plans for late budgets.In states that have no formal statutory or constitutional contingency plans but have a history of latebudget adoption, procedures have historically been put in place to address government payments andmanage cash flow during periods of budget delays. Some states have contingency plans that allow themto operate under an executive order, a continuing resolution, or an emergency spending bill. Thesemeasures ensure that the state can continue government operations, including the payment of debtservice obligations. For bonds that require legislative appropriation, such as lease-backed debt, moststates set debt service payment dates well beyond the start of the a state’s fiscal year to avoid possibledelays in the event of a late budget adoption.Even with contingency plans or established mechanisms, late budget adoption at the state level candisrupt the flow of state payments to vendors and employees, as well as school districts, cities, publicuniversities and other political subdivisions such as transit systems that rely in part of state funds. A delayed state budget could also result in late debt service payments but states have historically madespecial accommodations to allow debt service payments to be made on time.