Minnesota infrastructure plan faces political obstacles

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Minnesota Gov. Tim Walz’s proposed $2.6 billion, mostly bond-financed capital budget will take center stage as a divided legislature kicks off its 2020 session next month.

The package, dubbed the 2020 Local Jobs and Projects Plan, relies on $2 billion of general obligation borrowing with the other $600 million funded through a mix of appropriation-backed bonds, general fund cash, GO-backed trunk highway bonding, and user-financed bonds. It's already received pushback from Republican lawmakers concerned over its size.

The plan “provides essential state investment in communities across Minnesota, focused on housing, water quality and infrastructure, higher education, public safety and quality of life,” said Management and Budget Commissioner Myron Frans. “With eight years of balanced budgets, a rainy-day fund, AAA credit ratings and low interest rates, we can afford a robust capital budget bill that is below our state debt limits.”


The state funding would, in turn, leverage an additional $887 million in federal, local and private funds, Frans said. The state received a total of $5 billion in funding requests, $1.3 billion from local units of governments and $3.7 billion from state agencies.

Walz rolled out the package in pieces last week. The public safety piece earmarks $857 million for public safety facilities and roads and bridges with another $675 million going toward local facilities, transit and trails.

“This proposal will make sure that our emergency services, as well as aging roads and bridges, are repaired and upgraded,” Walz said.

The higher education proposal totals $488 million to update and modernize public college and university campuses. The package would spend $300 million on affordable housing projects and $300 million for water quality projects across the state.

Minnesota's government is divided, with the Democratic-Farmer-Labor Party controlling the governor's office and House of Representatives. The Senate is held by Republicans. Election-year politics will influence any action as both chambers face re-election this year. Walz was elected to a four-year term in 2018.

The session begins Feb. 11 and more fiscal guidance will come soon after in the release of one of two annual fiscal forecasts. The February forecast is released in early March and follows the November forecast that is published in early December. The November forecast projected a $1.3 billion surplus in the current $48 billion biennial budget.

The legislature typically takes up the two-year operating budget in odd years and a small version of the capital budget known as the “bonding bill” with the larger capital plan typically the focal point of even-year sessions.

Walz pitched a sizable $1 billion bonding package last year, but the GOP rejected it and Republicans are critical of the size of the latest proposal.

The November forecast bolstered state reserve to their targeted level of $2.359 billion and Walz said state coffers can afford a “robust” infrastructure package this year.

Republicans have criticized Walz since he first pitched the $2 billion figure late last year, pushing instead for tax reductions.

Past bond bills have typically hovered around $1 billion and while House Minority Leader Kurt Daudt, R-Crown, said he could support a higher bill, $2 billion is too much.

“Moderate debt is what gave us our good bond rating,” said Senate Majority Leader Paul Gazelka, R-Nisswa.

Frans said Tuesday that it is inaccurate to imply that $2 billion of new GO debt would push the state's debt above the moderate level.

He countered that from rating agency perspectives the state would still fall into the moderate level if it authorized the $2 billion. The debt level is also just one contributing factor to the state's high-grade ratings in addition to reserves, budgetary balance, and its diverse economy.

The $2.6 billion figure also reflects pent up demand after the state passed little new infrastructure borrowing last year.

Transportation needs also will be a subject of debate as transportation-related spending is limited in the proposed capital plan because Walz wants a dedicated revenue stream to provide ongoing funding. The state’s 20-year highway plan warns of $18 billion in unfunded needs. Republicans rejected Walz’s proposed 20-cent-per-gallon gasoline tax hike to provide an ongoing stream of new revenue last year.

Some in the GOP have suggested putting more of the surplus toward transportation and bridge projects, but Democrats counter that excess general fund dollars shouldn’t go toward transportation, especially since it would take the pressure off identifying a dedicated revenue stream.

Senate Republicans also have their own list of priorities in the session. The caucus intends to press for drug price reductions, wants to eliminate a tax on Social Security income, and will call for public safety measures to combat crime.

Officials attributed the surplus to higher-than-expected income and sales tax collections, which more than made up for lagging corporate tax revenue. Individual income tax revenue forecasts for the 2020-21 fiscal year beat out previous estimates by about 1.9% or $493 million. General sales tax revenue is similarly expected to increase by 2.2%, or $252 million.

“This is a snapshot in time, and there are risks in this forecast,” Frans said at the time. “We know that the forecast will go up or down in February, so we need to be careful and cautious."

Three-fifths supermajorities are required to authorize bonds. The state last borrowed in August when it sold $673 million of GOs. Ahead of the sale, Fitch Ratings and S&P Global Markets affirmed their AAA ratings and Moody’s Investors Service affirmed Minnesota at Aa1. All assign stable outlooks.

"Credit factors supporting the ratings include our view of the state's deep and diverse economy, strong financial results and healthy reserves, and moderate debt levels," said S&P analyst Cora Bruemmer.

The borrowing brought the state GOs outstanding to to $6.36 billion with another $2.1 billion of unused but authorized bonding authority.

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