Minnesota lawmakers, awash in revenue, will consider bonding package

Minnesota lawmakers return to work next week with infrastructure and surplus spending front and center.

The state’s formal November revenue forecast raised the expected surplus in the two-year budget approved last spring to $7.7 billion setting the stage for partisan debate on how much to direct toward tax cuts and state spending during a session typically devoted to passage of a capital plan known as the bonding bill.

An updated forecast in early March will provide further guidance. Officials warned late last year that the ongoing COVID-19 pandemic, supply chain struggles, and inflation cast some uncertainty over the state’s finances. The state also has another $1 billion remaining from its $2.8 billion share of the American Rescue Plan Act.

Minnesota governor's office

Gov. Tim Walz last week rolled out a proposed $2.7 billion bonding bill, a record size capital package that is taken up in even-numbered years following passage of the biennial operating budget in odd years. The proposal tops the record $1.9 billion bill adopted two years ago.

The plan calls for $2 billion of general obligation borrowing, $47 million of GO-backed user financed debt, $250 million of appropriation-backed bonds, and $149 million of GO-backed trunk highway bonds with cash rounding out the funding scheme.

The capital plan invests in “critical projects” with a focus on preserving infrastructure and historical assets, funding roads, bridges, housing and environmental investments that meet local and statewide needs, Walz said.

“With Minnesota’s strong economic outlook, we have an opportunity to make even more progress,” Walz said. “With a focus on projects like roads, bridges, fire stations, and veterans' homes, our plan will repair and replace critical infrastructure and improve the lives of Minnesotans in every corner of the state.”

A three-fifths supermajority is required to pass new bonding.

The plan earmarks $1 billion for asset preservation, $260 million for public university buildings, $560 million for roads, bridges, and water infrastructure grants, $450 million for affordable housing projects, $400 million for local projects, $260 million for environmental stewardship programs and $950 million for climate-related mitigation spending.

The package was culled from $5.5 billion of project requests, including $4 billion from state agencies and $1.5 billion from local units of government, Minnesota Management and Budget Commissioner Jim Schowalter said in a letter to the legislative chairs of the House and Senate’s Capital Investment Committees, which manage the legislative review of the bonding bill.

“This recommendation is fiscally responsible," Schowalter said of the capital package dubbed the 2022 Local Jobs and Projects Plan.

The House, which is controlled by the Democratic-Farmer-Labor Party, backs the bill and even greater spending but Republicans who hold a Senate majority have pushed back on the size saying they support robust spending on infrastructure but don’t have an appetite for that large a package. Walz is a DFL-er.

“In communities throughout Minnesota, there is an immense need for investment in local projects and resources that bring jobs and opportunities to the region, especially when it comes to investing in marginalized Minnesotans and addressing our state’s housing crisis. The recommendations put forward by the Governor do just that,” Rep. Fue Lee, D-Minneapolis, and chair of the House Capital Investment Committee, said in a statement.

The state’s high bond ratings and low interest rates indicate an opportune time to sell state bonds to fund infrastructure projects, Fue said. The administration will formally present its proposal to the House committee Feb. 4.

Whether any of the state’s multi-billion surplus should go to fund the infrastructure and how to use the surplus will also play out in the upcoming debate. The state is also set to receive $6.8 billion from the new $1.2 trillion federal infrastructure plan but Walz has warned that more guidance is needed before the state embarks on allocating that money.

Walz late last week followed release of the capital budget with budget proposals that envision using a portion of the surplus and remaining ARPA funds to pay for a series of economic investments in broadband, technology, and workforce development as well as one-time tax rebates.

Tuesday the governor laid out further proposed budget revisions that would increase spending over the next three years by $5 billion for education and social program related spending including a 2% hike in kindergarten through 12th grade education. On Wednesday, he will announce public safety plans.

One piece of the plan calls for cutting checks of up to $350 million for a total of $700 million in direct taxpayer payments to about 2.7 million households in what the governor has dubbed “Walz Checks.”

The plan would direct $1 billion through $1,500 payments to eligible frontline workers, spend $2.73 billion to replenish the state’s Unemployment Insurance Trust Fund and expand the childcare and education tax credit eligibility.

Republicans endorsed paying down the unemployment trust fund deficit to avoid taxing business or cutting benefits but dismissed the “Walz Checks” as a political ploy during an election year and said they would soon offer a package of broader, permanent tax cuts.

“Instead of gimmicky checks designed to boost approval ratings, we need permanent and ongoing tax relief. Sending just a fraction of the surplus back to Minnesotans is unacceptable, especially with inflation at record levels,” Deputy House Minority Leader Anne Neu Brindley, R-North Branch, said in a statement. “House Republicans will push for meaningful and permanent tax relief, and to send as much of the surplus back to Minnesotans as possible.”

The state’s November forecast that projected a $7.7 billion surplus marked a dramatic turnaround from a year earlier when red ink driven by the pandemic’s anticipated tax blows loomed.

The tide shifted as it did for many states later in the year as tax revenues rebounded from early pandemic lows and that gap then evaporated in the February 2021 forecast when a $1.57 billion surplus was projected heading into budget season.

The latest figures showed a $127 million fiscal 2021 ending balance last June 30 and a $3.1 billion surplus from fiscal 2021 as final spending and tax collections were counted.

The projection was further fueled by economic recovery and growth that are expected to produce an additional $5.5 billion of revenue gains in the current biennium. Strong growth in income, consumer spending and exceptionally high corporate profits drove the revenue growth projections.

The numbers did not include any of the state’s $2.8 billion in ARPA relief. Based on statutory requirements, a portion of the surplus — $870 million — goes into the state’s rainy day fund. The state had dipped into the fund to cover previous red ink. With the forecast the budget reserve was restored to $2.66 billion.

Another $111 million will go into a stadium reserve account leaving $7.7 billion in the $52 billion operating budget for the governor and lawmakers to argue over in the session that begins Jan. 31.

The $52.3 billion budget package won bipartisan support on the last day of the fiscal biennium June 30, a task not always seen given divided leadership and past battles over spending, bonding, taxes, and Walz’s emergency COVID-19 powers.

The state typically borrows in the late summer and ahead of its $870 million general obligation sale this year the state won two improved rating agency outlooks.

Moody’s Investors Service moved its outlook on the Aa1 rating to positive from stable. S&P Global Ratings moved the outlook on its AAA rating to stable from negative.

Fitch Ratings affirmed its AAA rating and stable outlook ahead of the sale.

Update: The story was updated with budget proposals Walz made Tuesday.