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Why the Minnesota Legislature’s $825 million bonding bill was not really a $825 million bonding bill

The bonding bill approved by the Minnesota Legislature this year includes a lot of projects to be paid off not from the general fund, but from dipping into other sources of money, some of which were established with specialized purposes.

Republicans in the Legislature stuck to an $825 million maximum in their GO bond proposal, arguing that this number was in range with previous bonding bills in even-numbered years.
MinnPost photo by Corey Anderson

Common carp are notorious for feeding at the bottom of lakes, tearing up aquatic plants and clouding the water, which changes ecosystems and impacts the food chain. And since no natural predators exist in Minnesota to keep the adult carp population in check, they overpopulate. “They get really big and really hearty and grow real fast,” said Anna Brown, a planner and project manager at the Minnehaha Creek Watershed District.

This summer, the watershed district and the Minnesota Invasive Aquatic Species Research Center are working to manage the carp population in Six Mile Creek, which leads to Lake Minnetonka’s Halstead’s Bay, where research found what Brown called “staggering” populations of the fish. They’ll remove adult carp; build barriers to regulate their movement; and preserve fish species that feast on carp eggs. It’ll be similar to work that’s successfully controlled the carp population in two other metro area lakes, St. Paul’s Lake Phalen and Chanhassen’s Lake Riley.

All of these efforts were mostly paid for with money out of a fund first approved by voters 30 years ago — and it’s exactly the kind of work that supporters describe as the purpose of the Environment and Natural Resources Trust Fund, which gets its money from the state lottery.

But now, for the first time in the fund’s history, the money will be used for a much more prosaic purpose: paying off debt on infrastructure projects. Earlier this year, the Minnesota Legislature approved using $98 million  plus interest  from the trust fund to pay off debt over the next 20 years on projects like sewage treatment and trail maintenance.

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To detractors, the move is a bastardization of the trust fund’s original purpose. “It’s a blatant raid on the lottery,” said Nancy Gibson, a citizen member and co-chair of the Legislative-Citizen Commission on Minnesota Resources, which recommends environmental projects to the Legislature from around the state to be paid for by proceeds from the Environment and Natural Resources Trust Fund.

State Sen. Chris Eaton, DFL-Brooklyn Center, goes even further, calling the move unconstitutional. “That shouldn’t be possible to do,” she said.

What’s more, the move may end up costing taxpayers more in the long run than the method historically used by the Legislature to pay for such projects. “They wanted to look like they were being thrifty,” Eaton said of the Republican leaders who control the Legislature, “but actually they were just being financially ridiculous.”

The product of a messy legislative process

This year, DFL Gov. Mark Dayton proposed a $1.5 billion bonding bill, which traditionally funds infrastructure projects around the state with general obligation bonds. These GO bonds, which are backed by the full faith and power of the state, are guaranteed per the Minnesota constitution to be paid off by the state’s general fund. In fact, should the state default in paying these bonds off, the Minnesota constitution allows the state auditor to impose a new property tax, though it’s never come to that.

For investors, that’s as safe a bet as any. And Dayton’s administration claimed that the state could borrow as much as $3.5 billion in GO bonds this year without jeopardizing its AAA bond rating, which allows it to pay the lowest interest rates.

Republicans in the Legislature, however, stuck to an $825 million maximum in their GO bond proposal, arguing that this number was in range with previous bonding bills in even-numbered years. Dayton eventually signed the measure — reluctantly, he said — which made the bonding bill one of the few major accomplishments of an otherwise contentious 2018 legislative session.

State Sen. Torrey Westrom, R-Elbow Lake, argued said that staying within the $825 million range of GO bonding “helped the fiscal integrity of the state budget.”

MinnPost photo by Briana Bierschbach
Earlier this year, the Minnesota Legislature approved using $98 million from the trust fund to pay off debt over the next 20 years on projects like sewage treatment and trail maintenance.

Yet it turns out the Legislature borrowed far more, though in a way that didn’t get as much public attention. In addition to the GO bonds, the final bonding bill also approves borrowing nearly $180 million in appropriation bonds, which will be paid off not from the general fund but from dipping into other sources of money, some of which were established with specialized purposes.

One of those sources is the Environment and Natural Resources Trust Fund, which is dedicated to the “protection, conservation, preservation, and enhancement of the state’s air, water, land, fish, wildlife, and other natural resources.” First passed by Minnesota voters in 1988, it was re-approved by voters in 1991 and 1998. (This is an entirely separate trust fund and constitutional amendment from the voter-approved 2008 Legacy Amendment.)

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The irony is that all of this may come at a higher cost to the public. Unlike GO bonds, which the state is obligated to pay off, the Legislature must periodically renew how debt from appropriations bonds is retired. For investors, relying on the Legislature to renew the funding streams for the bonds is more risky, which means they are sold with a higher interest rate.  

Last September, for example, MMB sold general obligation bonds with a 2.73 percent interest rate. The following month, to fund the Lewis and Clark rural water system budget, the agency sold appropriation bonds at a 3.4 percent interest rate.

Minnesota Management and Budget, the state agency that issues bonds, is planning to issue the GO bonds covered in the bonding bill this August and the appropriation bonds the following month. Yet MMB Assistant Commissioner for Debt Management Jennifer Hassemer warned against looking too closely at the past to predict the future. “We cannot predict the interest rate on an environmental trust fund appropriation bond sale,” Hassemer wrote to MinnPost in an email. “The interest rate will depend on market conditions at the time of the sale.”

Subverting the ‘intent of the voters’?

GOP lawmaker Westrom acknowledged that appropriation bonds’ interest rates may be “slightly higher” than they would for general obligation bonds. But he emphasized that tapping into the Environment and Natural Resources Trust Fund to pay for things like wastewater treatment is a good use of the money — a  way to repurpose its funds toward projects that people “can tangibly use to enjoy the environment.”

Sen. Torrey Westrom

Too much of the trust fund in the past, he argued, went to “studies and research projects that kind of sit on the shelf and don’t actually do something.” And because projects like wastewater treatment are arguably related to the environment, Westrom characterized the new spending mechanism “fitting right in the constitutional language” of the trust fund. “This is a way to help target some dollars that are meant to improve the environment to go to such a purposeful issue that’s very real and exists across the entire state,” he said.

Others, however, emphasize that the trust fund was never meant to be used to pay off debt, and that in using the money for such a purpose, the Legislature circumvented public bodies like the Legislative-Citizen Commission on Minnesota Resources.

Dayton said as much when he criticized the move for “subverting” the LCCMR board’s “rigorous process of review and recommendation.” “The intent of the voters,” Dayton wrote in a letter accompanying his signing of the bonding bill, “was to dedicate a long-term source of funding to protect, conserve, preserve and enhance Minnesota’s ‘air, water, land, fish, wildlife, and other natural resources’ for the benefit of all Minnesotans. I regret that I am unable to erase the dangerous policy language included in this bill that, if continued, would drain resources from this Fund.”

But is it constitutional?

Probably. Mary Jane Morrison, a professor emerita at Hamline Mitchell Law School, said the question revolves around whether there’s a “rational connection” between paying for wastewater treatment and preserving natural resources. “The answer is yes, because wastewater, when it’s treated, sometimes goes back into lakes and streams and into the ground,” Morrison said.

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David Schultz, who teaches political science at Hamline University and constitutional law at the University of Minnesota Law School, also argued that the connections between wastewater treatment, the environment and pollution “is very tight.” But he called the spending habit of raiding trust funds to pay for things they were not originally set up for political reasons “kind of gimmicky.”

“It’s basically saying, ‘We can’t get the money through the normal routes and therefore we’re going to find an end-run and stretch the rationale for the other fund to do that,’” Schultz said.

Budget gimmicks like this from legislatures in Minnesota and neighboring states like Wisconsin have been commonplace for the past two decades, he said. (Minnesota has twice borrowed against its massive 1998 tobacco settlement — in 2003 and 2011 — to fix budget holes.) And once the bonds are issued, there might not be much opponents can do to oppose them.

Eaton, for one, sees the practice of dipping into other funds as evidence of GOP legislators wanting it both ways. On one hand, they get to say their bonding bill was more frugal than the version offered by a DFLer like Dayton. At the same time, they can tout getting infrastructure projects for their districts to their constituents heading into reelection this fall.

Easton said she plans to bring the issue back up during the next legislative session. She wants to introduce a bill next year that would “put a little lock” on how the Environment and Natural Resources Trust Fund can be used. “I still want the projects to continue to be funded,” she said. “But they need to be funded on GO bonds. I plan on trying to fix it.”