Minnesota Budget Bickering Persists

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CHICAGO - The Minnesota Legislature this week adjourned its 2009 session during which lawmakers passed a capital bonding package and new rules temporarily allowing the state to use negotiated sales for its debt. However, they failed to reach a budget agreement with Gov. Tim Pawlenty, leaving a $2.7 billion hole to plug.

The Legislature also rejected Pawlenty's proposal to issue about $1 billion of appropriation-backed bonds that were to be repaid with the state's $200 million annual share of tobacco settlement funds.

The plan was included in Pawlenty's original $57.6 billion, two-year budget unveiled earlier this year. Proceeds were to have gone to pay debt service on other bonds as part of his plan to eliminate the estimated $4.6 billion deficit.

Pawlenty, a Republican, and lawmakers attempted to work out their differences on Monday to reach an agreement on a balanced budget for the biennium beginning July 1, but the two sides remained at loggerheads over spending and revenue issues. The Democratic-controlled Legislature had previously approved a $1 billion tax increase that would have helped address the remaining deficit, but the governor vetoed it.

Late Monday, Democrats again pushed for the tax hike - which they contended was needed to fend off steep cuts in school, health care, and local aid funding - coupled with a $1.8 billion accounting shift supported by Pawlenty, but the tax increase meant the plan was dead on arrival. The Legislature was required to adjourn by midnight Tuesday.

Lawmakers ended up approving various bills with a total of $34 billion in general fund spending, but with only an estimated $31 billion in revenue, a $2.7 billion gap remains. The state's latest revenue estimates in February projected a $6.4 billion deficit, but that figure was reduced to $4.6 billion by $1.8 billion in federal stimulus funds.

Pawlenty said yesterday he would not call a special session and will work with his cabinet and others to close the gap through spending cuts. It's a process referred to as "unallotments," a statute that allows the governor to trim authorized spending in the next fiscal year when the state lacks sufficient revenue.

Pawlenty, who opposed any move to raise taxes, slammed lawmakers yesterday.

"The basic responsibility of the Legislature is to responsibly pass a balanced budget and the DFL failed," he said, referring to the Democratic-Farmer-Labor Party that is Minnesota's Democratic Party. "But politics as usual around this place is over. We're not going to have a special session or a state government shutdown. Tough decisions are ahead, but those decisions need to be made if we are going to get through this difficult economic time and build towards a better future."

Pawlenty's original budget sought to eliminate a deficit and rebuild the state's reserve by cutting $2.5 billion in spending and by raising $3.1 billion in one-time infusions of revenue. That included selling the appropriation bonds.

While lawmakers and the governor failed to find consensus on an operating budget, a small, off-year capital budget known as the bonding bill was approved. A legislative conference committee settled on a $295.5 million program, but Pawlenty used his line-item veto power to cut about $82 million.

Minnesota will issue general obligation bonds to finance the program in the coming years, said state debt manager Kathy Kardell. The state typically passes a smaller capital budget in the same year as a two-year operating budget is adopted and a larger one - lately in the range of $1 billion - the following year.

On the debt management front, lawmakers approved several measures sought by Kardell to provide her office with more flexibility as it navigates through the market turmoil and changes of the last year brought on by the credit crunch.

As part of the bonding bill, the Legislature approved and Pawlenty signed a measure allowing the state to sell new-money and refunding GOs via negotiation through the next biennial cycle. Current statutes require all state GO debt be sold competitively with a final maturity of 20 years. All of Minnesota's GOs are fixed rate as officials lack the authority to issue floating-rate debt. The state has $4.65 billion of outstanding GOs that are rated Aa1 by Moody's Investors Service and AAA by Fitch Ratings and Standard & Poor's, although Fitch assigns a negative outlook.

"This really gives us the flexibility we need going forward to make sure we have access to the market when we need it," Kardell said. While some lawmakers raised concerns over lifting the competitive requirement entirely, she said, "We will revisit the issue in the next budget as we watch to see if the market changes over the last year are temporary or longer term."

Although it's a rare issuer, Minnesota directly felt the impact of the market turmoil last fall. As Kardell's team was readying a $440 million transaction in the fall, the market froze following Lehman Brothers' bankruptcy. Officials delayed the transaction and watched for other large competitive deals to hit the market first, but they were forced to put off the deal until earlier this year as it awaited the formal November revenue forecast.

Minnesota's next GO sale is slated for summer but has not yet been sized. Kardell doesn't expect to tap her new powers to do a negotiated sale just yet. She is also still reviewing request for proposals from financial advisers and said she would wait on those appointments before launching an RFP for underwriters for use on future sales.

Financial advisers picked by the state would assist officials in exploring the option of marketing some portion of GO sales to retail investors, creating a state Web site to promote bond sales, and developing a more formal targeted and effective investor-relations strategy.

Lawmakers also approved rule changes that would allow the state to tap the federal government's taxable Build America Bond program, but Kardell said based on the current market there is little value for the state. That's because the greatest value in issuing taxable bonds to capture the 35% interest subsidy is on the long end of the yield curve and Minnesota state debt goes out only 20 years and is rapidly amortized.

Lawmakers also approved the sale of certificates of participation to fund an $82 million statewide accounting and tax and procurement system.

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