Minnesota bond bill is collateral damage in coronavirus fight

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After several failed shots, Minnesota Gov. Tim Walz won’t call lawmakers back to work to take another stab as passing a long-stalled, bond-financed capital plan until fall at the earliest.

The legislature closed out its regular session in May without passing a public works funding package and failed during two special sessions — an eight-day session in June and the other a nine-day session earlier this month — to pass a compromise $1.8 billion package referred to in the state as the “bonding bill.”

“Not getting the bonding bill was simply unacceptable,” Minnesota Gov. Tim Walz said last week.

The state typically passes a two-year operating budget in odd years leaving the larger “bonding bill” to serve as the focus of attention in even-year sessions. Backers said passage of this year’s capital plan was made all the more urgent by the COVID-19 pandemic’s economic impact on the state and its local governments.

The package left on the July special session table totaled $1.8 billion, relying on $1.35 billion of general obligation borrowing and $300 million of GO-backed trunk highway bonding that is repaid with transportation related revenues.

The bond bill foundered on partisan conflicts, with the biggest obstacle being the GOP House minority, which resisted efforts by Walz, a Democratic-Farmer-Labor Party member, to combat the COVID-19 pandemic with social distancing and mask-wearing orders.

The disease has killed at least 1,580 Minnesotans, according to data posted Tuesday by the state Department of Health.

The GOP holds a majority in the Senate and the DFL holds a majority in the House. Borrowing requires a 60% majority vote so votes from both parties are needed in both chambers.

While lawmakers during the July session agreed to police accountability reforms in the wake of the Minneapolis police killing of George Floyd and ensuing protests, the capital budget couldn’t overcome the political divisions and with the state planning to issue new money bonds in August the administration said it can’t pursue another special session due to disclosure issues.

“Not getting the bonding bill was simply unacceptable,” Walz said last week, calling the maintenance of infrastructure a fundamental requirement of state government.

He blamed the House GOP minority leadership for an “unwillingness to bend” for blocking the package over his unwillingness to cede powers related to peaceful emergencies including the use of executive orders without legislative approval. The bonding bill and tax relief measures tied to the bill had been agreed to by Senate leaders of both parties and the House Democratic majority.
Minnesota Management and Budget has not set the timing and sizing of the August sale. The state typically borrows new money in mid-to-late summer and if refunding opportunities are available will issue new money and refunding bonds.

“Federal securities law requires us to present our financial position to investors so they can make informed investment decisions. Our financial position cannot change for a short period before or after the bond sales in August. This means the next opportunity for the Legislature to make any changes to the budget, including a bonding bill, must wait until late September when this blackout period ends,” said MMB spokesperson Chris Kelly.

Walz pushed the date potentially even further off saying come September lawmakers will busy with campaign season as the November election approaches and that could make passage even tougher so another attempt may have to wait until mid-to-late November.

Walz earlier this year pitched a $2.6 billion bonding bill package calling it affordable based on early 2020 revenue projections of a growing surplus. Some Democrats argued for even more spending while Republicans wanted some of the surplus returned to taxpayers. That was before the pandemic struck, leading to an economic shutdown in mid-March.

House Democrats backed a $2.5 billion version while the Senate GOP majority pressed a nearly $1 billion bill but the regular session ended without an agreement.

Legislative majorities more recently had hashed out a $1.8 billion package but the House GOP minority said it was left out of negotiations and tied its support to Walz’ agreement to give up some of his peacetime emergency powers used to manage the state’s pandemic response but a deal could not be reached.

Walz said he offered to compromise but it was not enough for the House GOP members and time ran out.

The House GOP countered that its opposition ran deeper as they were left out of the bonding bill negotiations and said a deal could be reached by quickly calling another session.

“Instead of restoring the legislature’s role as a co-equal branch and crafting a bonding bill that can earn support from House Republicans, Democrats continue to push a bill that includes several poison pills that they know are non-starters for our caucus including Bottineau Light Rail language and funding for a train to Duluth,” GOP House minority leader Kurt Daudt said in a statement.

Walz recently extended his emergency powers by executive order to Aug. 12. The GOP-led Senate voted in favor of removing the governor’s powers but the House rejected it.

The bonding bill allocated funding for transportation projects, state building projects, environment spending, local regional planning agencies, state colleges and universities, corrections and human services, some local projects, the Minnesota Zoo, and housing. It also authorized $147 million in appropriation bonds with $100 million for housing infrastructure, $30 million to fund Pollution Control Agency projects, $15 million for public television infrastructure, and $2 million for electric vehicle charging infrastructure.

The legislature did approve and Walz signed the Minnesota Police Accountability Act, authored by members of the People of Color and Indigenous Caucus.

The legislation spurred by George Floyd's death under the knee of a Minneapolis officer reforms use of force procedures, bans certain practices such as chokeholds, imposes arbitration reforms, mental health training, other training and standards reforms, and creates a new advisory council with citizen voices.

Difficult decisions lay ahead as Walz and lawmakers must agree on a plan to close a $2.4 billion budget hole after the COVID-19 pandemic put an end to the state’s long streak of budget surpluses. The state expects $45 billion in total revenues for the biennium, down 7.4% from prior estimates.

The revenue hit wiped out the $1.5 billion surplus projected in the state’s annual February forecast and revenues are now projected to fall by $3.6 billion while spending is anticipated to rise by several hundred million. That leaves the state with a $2.4 billion gap in the two-year budget that runs through June 30, 2021, MMB Commissioner Myron Frans announced in May.

The state intends to use a portion of its nearly $2.4 billion rainy day fund built up from years of surpluses and the revised projections give the state legal authority to now dip into that surplus to manage. The state also maintains a $350 million cash flow fund.

But Frans has stressed the state can’t dig too deeply into the reserve, saying caution in needed as the revenue hole could extend into the next biennium and Walz has warned of “shared sacrifice.”

MMB in a July 10 report revised revenue for fiscal 2020 up by $168 million to $21.8 billion from the revised May interim forecast that incorporated the pandemic tax blow for the fiscal year. Net tax receipts exceeded the projection for income, corporate, and sales taxes, offsetting net revenues from other taxes that were lower than projected.

“Minnesota appears well positioned to address its projected revenue shortfalls by relying on federal coronavirus relief funds to cover eligible costs and replace reductions in state aid to local governments, as well as by potentially delaying some planned capital projects and enacting potential hiring and salary freezes for state employees,” Fitch Ratings said in a review published earlier this month.

In addition to tapping its nearly $2.4 billion rainy day account, the state can also push fiscal pain downstream, delaying the distribution of state aid to local government units such as higher education institutions and K-12 schools.

In the credit review, Fitch affirmed the state’s AAA rating on $6.7 billion of GOs.

The rating agency also affirmed the AA-plus on $860 million of appropriation-backed bonds as well as the school enhancement program and $70 million of 2014 certificates of participation and its $58 million of office building leave revenue bonds sold through the St. Paul Port Authority. The outlook is stable.

The state received $2.2 billion in direct aid for COVID-19 costs in the CARES Act signed March 27. The state directed $1.35 billion to local governments for their response costs, to provide small business grants and cover coronavirus testing and supplies.

Fitch said the state has no plans to tap the Federal Reserve’s short-term Municipal Liquidity Facility lending program and that cash on hand in various operating funds which totaled $9.3 billion in fiscal 2019 allows it to manage liquidity.

S&P Global Markets also rates Minnesota AAA and Moody’s Investors Service rates it one notch lower at the Aa1 level. All assign stable outlooks.

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State and local finance Coronavirus Infrastructure State of Minnesota State budgets Minnesota
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