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The Walz administration is proposing to spend $2.6 billion in state construction spending. Is that too much — or too little?

Gov. Tim Walz
MinnPost photo by Peter Callaghan
Gov. Tim Walz now begins the campaign to convince 60 percent of the members of the state House and Senate to approve the borrowing he needs to complete the projects on the list.

Gov. Tim Walz has completed the four-part unveiling of  his 2020 construction budget request, a months-long effort that included thousands of pages of requests, hundreds of site visits and ultimately a $2.6 billion price tag

The governor’s proposal for the 2020 version of the so-called bonding bill — the main focus of the even-year “bonding sessions” at the Minnesota Legislature — includes everything from affordable housing grants to aid for state and local bridges and rail crossings. It includes money to help Metro Transit build the D Line bus rapid transit line; funding for a new State Emergency Operations Center; and a new Institute of Child Development building at the University of Minnesota-Twin Cities.

“I want to thank Minnesotans,” Walz said while standing in the current emergency operations center. “They did the work. They vetted the projects. They made the case.”

Yet that work might turn out to have been the easy part. The DFL governor now begins the campaign to convince 60 percent of the members of the state House and Senate (technically 61 percent in the Senate or 41 votes) to approve the borrowing he needs to complete the projects on the list. The super-majority requirement in the state constitution means that members of the minority caucuses of the House and Senate must be consulted in order to get the votes needed to approve the borrowing.

“I hope the Legislature does their work. Hold hearings. Bring in the mayors. Talk to people about what these projects are,” Walz said. “Don’t come with an ideologically rigid place that does not match up with the facts. That is not the place where Minnesotans and their elected leaders are.”

“It’s not about too much or too little,” Walz said. “It’s the right amount and what you get for it. It’s about the projects that are in this bill, not the overall number.”

The reference to the proposal being “too much” stems from complaints from Republican legislative leaders that the total for his bonding proposal is too high. “The past two bonding bills were $825 (million) and $998 (million) in (general obligation) bonds,” Senate Majority Leader Paul Gazelka said after the first of four budget rollouts. “I’m more comfortable with those kinds of numbers than $2 billion.”

Gazelka has cited the most-recent state Budget and Economic Forecast, released in December by the state Office of Management and Budget, as an appropriate guide for a bonding bill. 

“Our last budget forecast tells us how much we can do in bonding without having to pay any more in interest than what we planned. And that number is $755 million,” Gazelka said during a rollout of the Senate GOP agenda for the 2020 session.

“We’re publicly saying we should have a bonding bill. I think it should be closer to the numbers we had before. The closer it is to that number, the more support I have for it,” said the Nisswa-area Republican.

Yet the Walz plan is well within the debt guidelines crafted a decade ago by the Office of Management and Budget under the administration of GOP Gov. Tim Pawlenty. While Minnesota does not have either constitutional or statutory limits on how much debt it can accumulate, the guidelines were created to maintain fiscal responsibility and stay in the good graces of bond-rating agencies that determine the interest rates paid by governments that sell municipal bonds. After dipping during the Great Recession, Minnesota’s bond ratings are among the highest in the U.S.  

By those rules, the state could borrow an additional $3.5 billion. Walz didn’t want to go that high and left many requests out of his plan. The total value of all submitted requests came in at $5.3 billion. Of that, $4 billion worth of project requests came from state agencies, including colleges and universities, while $1.3 billion came from local governments.

MMB Commissioner Myron Frans said the number Gazelka cites is the average of the last 10 bonding bills, a calculation he is required to make along with the principal and interest that would be needed to cover that borrowing. The money for annual interest and principal payments is set aside so lawmakers don’t assume it is available for other spending.

The average “was never designed to be a predictor of what we should do or a guideline for what we should do,” Frans said. “It has nothing to do with affordability.”

The estimate of what the state could responsibly borrow under those Pawlenty-era standards looks at the personal income of all residents of the state. For example, The state’s current sold debt of $7.8 billion is 2.26 percent of the 2020 estimate of state personal income of $345 billion.

The guidelines also try to assure that the state is paying off its debt quickly. The guidelines ask that no less than 40 percent of debt will be paid off within five years and no less than 70 percent is paid within 10 years. This reflects the reality that long-term debt — most commonly 30 year bonds — is added every year or two but that as new bonds are being sold, older bonds are being retired.

The state is meeting this guideline as well, Frans said.

Senate Majority Leader Paul Gazelka
MinnPost photo by Peter Callaghan
“Our last budget forecast tells us how much we can do in bonding without having to pay any more in interest than what we planned. And that number is $755 million,” Senate Majority Leader Paul Gazelka said during a rollout of the Senate GOP agenda for the 2020 session.
Unlike other states, Minnesota doesn’t codify its debt limits in the state Constitution or even in statute. Rep. Bob Vogel, R-Elko New Market, has tried to change that with legislation that would use a different measure than the one established by MMB. His legislation, House File 1890, was introduced during this Legislature but did not receive a hearing. The concept, last heard when the GOP controlled the House in 2018, would prohibit the state’s interest and principal payments from exceeding 3.5 percent of the state’s general fund tax collections.

Vogel says the plan would make sure current lawmakers don’t place too much burden on future lawmakers, and future taxpayers, for borrowing in the present.

“Debt is a good thing if you use it properly and become a difficult thing if you don’t,” Vogel said. “You’re spending future income, in this case future generations of income, for things you’re doing today. We’re spending other people’s money in this case. We should be as complete as we can in looking at how much debt we are issuing.”

Frans, who was Revenue commissioner and then MMB commissioner under former Gov. Mark Dayton, said he opposed Vogel’s bill, arguing that having a statutory limit would take away needed flexibility to respond to economic downturns.

“The first thing to drop is revenues, and they drop fast,” Frans said. “You may want to continue to spend to create jobs. You’d be in violation of the statute and all it does is point a red flag at you for the rating agencies.”

Even so, Frans said the state’s current and proposed bonding would be beneath the Vogel limit. The state’s current general obligation bond debt service amounts to 2.3 percent of the general fund revenues cited in the bill. Total debt, which includes borrowing that isn’t a general fund obligation of the state, is 2.9 percent of revenue.

“We think the guidelines have worked well,” he said.

Where Minnesota ranks 

In its most-recent state-by-state comparison of spending and revenue, the Minnesota Center for Fiscal Excellence places the state in the middle of the pack in the amount of debt it has taken on. Looking at each household’s share of interest on borrowing, Minnesota ranks 21st among states, with $761 of debt per household.

Mark Haveman, the executive director of the center, said he had no reason to question the wisdom of the MMB’s guidelines on debt — that is, where it fits on the “Goldilocks Spectrum” of too much, too little and just right. And he said it makes good fiscal sense to use long-term borrowing for capital investments that have a longer life than current taxpayers.

He does question whether using state total personal income as the primary metric is the best measure to be used. “State personal income has and will continue to experience change because we’re seeing government transfer payments take up a larger share of state personal income growth than it has in the past,” Haveman said. That will continue with the retirement of baby boomers. That means, he said, that total personal income growth might not reflect a growing economy as much as it has in the past.

MMB Commissioner Myron Frans
MinnPost photo by Peter Callaghan
MMB Commissioner Myron Frans said the state’s current and proposed bonding would be beneath the Vogel limit.
Haveman said he thinks something akin to the Vogel bill might be beneficial because comparing actual revenue collections with the size of debt payments has a closer relationship with the ability to pay off state debt. Haveman also sounds an alarm on the threat of unfunded government pension plans. That is a form of debt or obligation that isn’t factored into the MMB guidelines. Minnesota’s pension debt is $15.2 billion, 25 percent more than all of the state’s existing debt obligations, he said.

“If lawmakers would direct a fraction of the time they spend debating how much general obligation bond we can afford and focused on how we could make our retirement systems sustainable, the state would benefit tremendously.”

Some bonds — housing appropriation bonds and trunk highway bonds, for example — require only a simple majority to pass. But most need 60 percent, and Walz said last week that while he’d like to get that many lawmakers to approve his plan for its overall effect on the state, he recognizes that some want to know what is in it for their districts. 

Standing next to map of the state with dots representing each of the projects in the budget, he said. “I put it together, yes, to make it difficult to say, ‘No.’ But that is organically how it happened, because this is what Minnesotans said. Each one of these dots has a local legislator in it. Each one of these dots has someone who can come here and help me get this passed.”

Comments (6)

  1. Submitted by Eric House on 01/22/2020 - 11:48 am.

    I don’t know the ‘right’ amount of debt to incur, but I am more inclined to buy into Gov. Walz’s theory of reviewing the projects under consideration to see if they are truly appropriate, than Sen. Gazelka’s knee jerk reaction that he wants to spend less just because he thinks the numeric figure is a big number.

  2. Submitted by Mike Schumann on 01/22/2020 - 12:14 pm.

    Right now the economy is booming. This is when we should all, including governments, be paying off ALL of our debts and getting ready for the next economic downturn, which will inevitably come.

    In the current climate, we should be paying for all of our new projects and infrastructure maintenance out of current revenues, not new bonding. The goal should be to pay off all of the state’s outstanding bonds so that we have the ability to borrow during the next recession to pay for big public works projects to keep people employed and take advantage of reduced construction costs when we are in a down cycle and need the economic stimulus.

    • Submitted by Pat Terry on 01/23/2020 - 04:11 pm.

      That’s true if you are talking about year-to-year budgeting. Trump’s record deficit spending in a good economy is ridiculous. But for bonding, borrowing with very low interest now makes sense.

  3. Submitted by Ray Schoch on 01/22/2020 - 07:00 pm.

    If Mr. Schumann’s house and vehicle are paid for, he is not only extremely unusual in fiscal terms, he’s also better off than most of his fiscally-responsible neighbors.

    Operating on a cash-only basis can work, and I’ve done it on an individual level, but it works within some fairly severe limits. When dealing with the economic welfare of an entire state, especially when dealing with the kinds of numbers that a state typically finds in budgetary proposals, those limits can – and have – have a strangling effect on the economy, forcing states to pass up opportunities for providing facilities or services that citizens want and need, but that are beyond the fiscal reach of municipalities or counties.

    Now, when interest rates are low, may well be a good time to pay down the state’s debts, but it’s also the very best time – if borrowing is going to be done at all – to borrow for expensive capital projects, which is to say, most capital projects. If Mr. Schumann’s position is that the state shouldn’t borrow at all, he’s suggesting that we go back to gravel roads and drilling our own wells, not to mention watching our neighbors live under the nearest bridge because they were bankrupted by our profit-driven health care system. That’s a place I don’t want to go, or live in. The percentages presented in the article are themselves relatively conservative when measured against other states. Minnesota is generally well-managed, fiscally, and there’s no reason for the state to avoid debt simply because of ideological concerns.

    • Submitted by Gerald Abrahamson on 01/23/2020 - 11:37 am.

      The problem is a simple one: Interest rates are being artificially held low by the Fed and there is a massive surplus of cash floating around looking for a good use. This has been going on for a number of years and will likely continue for many more. The point is simple: When (not if) the economy crashes, what will happen to interest rates? Answer: Not much, because there is virtually no room to further discount interest rates. Low rates are a borrower’s dream, and that impact on the US economy is very significant (think real estate, housing, and all the economic activity involved in those areas). When that area crashes, the US economy is in trouble.

      New vehicle sales are down (number of vehicles sold), but the dollar-value is up due to high prices. The industry is hurting as a result. That will eventually catch up with the companies as people slow one area of over-spending (vehicles) and redirect that spending in other areas.

  4. Submitted by Paul Udstrand on 01/25/2020 - 10:36 am.

    Last I heard the state over a trillion dollars behind in spending just to maintain our infrastructure. I’m not saying we should bond that much, but obviously $2.6 billion won’t pay the freight.

    This article is yet another example of disfunctional spending analysis. Instead of determining how much our services and infrastructure cost or would cost if they were actually delivered to meet requirements, we get this facile discussion of comparative debts and spending.

    A rational approach to governing would simply calculate how much revenue is actually required to deliver the services and government people expect. Stuff costs what it costs and you either pay for it or you don’t. These inane analysis and arguments about debt levels and government spending only emerge from irrational financial management that fails to collect enough revenue to pay for spending.

    So here we have an entire and rather extensive article that supposedly asks whether or not $2.6 billion is “enough” but nowhere at any point in the entire article is there even a hint nor whiff of discussion about what the actual transportation infrastructure budget is or should be. Nor is there any discussion regarding the condition of our infrastructure.

    This is not a rational analysis “spending”, it looks more like a deep dive into a teapot.

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