The Minnesota House and Senate have passed bills authorizing the State of Minnesota to borrow about half a billion dollars this year to fund various construction projects around the state. The borrowing will finance big public works projects, paying for them over decades. There is always a great deal of politicking about which projects get funded this way as well as debate about how much the state should borrow.
Why is it called bonding?
The state borrows money by issuing bonds, called Minnesota State Bonds. A bond is a financial instrument that is very similar to a loan. The state receives a certain amount of money now and pays the bond holders back over time with interest.
What are the pros and cons of bonding?
That depends on your political and economic perspective. Democrats generally contend it is smart to borrow money when the economy is soft and interest rates tend to be low in order to spend on big projects that put people to work, in the hope that it will stimulate the economy. Republicans typically look at bonding as a spending issue and generally want to authorize less borrowing than DFLers do. They argue the way to create jobs is by improving the state's tax and regulatory climate.
Of course, money spent on projects funded by bonding and the debt payments on those bonds divert money away from other things that could be funded.
How did the bonding debate play out this year?
In January, Gov. Mark Dayton unveiled a plan for a $775 million bonding bill, saying it would create thousands of jobs. There was money in Dayton's proposal for the Minnesota Zoo, civic center projects in Rochester, St. Cloud and Mankato, a ballpark in St. Paul, as well as money for MNSCU and the University of Minnesota.
Republicans argued bonding is supposed to fund the construction and repair of buildings, bridges and similar projects, not serve as an economic stimulus or jobs-creation program. The GOP subsequently proposed bonding bills totaling about $430 million.
How did it wind up?
The House and Senate each ended up passing bonding bills for about $500 million. Both bills received the votes of 60 percent of members, as required by state law to pass such bonding bills. The Senate bill allocated money slightly differently than the House bill, and the House has agreed to go along with that. There is money for construction work at state colleges and universities, flood mitigation and renovations to the State Capitol, among other things.
Gov. Dayton has said he is willing to sign a bill that spends less money than he had proposed.
How much will it cost the state to borrow money this year?
The expectation has been the state would have to pay an interest rate of about 3.6 percent annually. It could be lower, depending on the bond market.
In the state's most recent (FY11) fiscal year, it paid about $500 million to service bond debts. To compare, that's more than the state's portion of the new Vikings stadium financing.
The state structures bond repayments so that interest and principal payments are higher at the beginning. The bottom line is that if the state borrows about $100 million, it pays back a total of about $150 million. By comparison, if a homeowner borrowed the same amount on a 30-year mortgage the total payback would be greater — something like $164 million.
What is the total borrowing now by the state? Is there a ceiling on state borrowing?
The dollar value of outstanding state general obligation bonds cannot exceed 3.25 percent of total state personal income (Per Capita State Bond Debt, 2007). That works out to about $8 billion. Currently, the state has about $6 billion in general obligation and related tax-supported bonds outstanding. So, at this point there is room for additional borrowing of about $2 billion.
How does state borrowing compare with that of the average consumer or the federal government ?
It's more restrained. While state borrowing is capped at 3.25 percent of state personal income, statistics from the Federal Reserve Board indicate total consumer debt exceeds personal income in the U.S., and so does the total federal debt.
Has Minnesota ever missed a payment?
With these general obligation bonds, that appears impossible. The state constitution says that if the legislature does not appropriate money to pay the bonds, the state auditor is to certify a state-wide property tax to pay the bonds.
What can these bonds be issued for?
State general obligation bonds must be issued for a public purpose. The projects have to be publicly-owned projects and have a public use. That's the primary purpose of general obligation bonds, according to the state constitution.
There are some other uses allowed by the constitution, but they are primarily holdovers from the early days of the state. Bonding money can be used to repel invasions or suppress insurrections, to promote forestation, and improve and rehabilitate railroads.
Is there anything unusual or especially noteworthy about state borrowing this year?
No. It is essentially consistent with what the legislature has done over the past decade, as far as issuing long-term bonds to pay for projects. This year's bonding bill is about $250 million less than the state has been borrowing in even-numbered years. However, last year the Legislature authorized about $500 million in borrowing, about twice what the state typically borrows in the first year of the two-year Legislative cycle.
How does borrowing affect the state's credit rating?
It's more the other way around. The credit rating affects the state's ability to finance projects with debt. Minnesota's creditworthiness determines what interest rate the state pays for borrowed money. Rating agencies seem more concerned about the overall state budget. Bill Marx, chief fiscal analyst for the Minnesota House of Representatives, says the state's credit rating has fallen a bit because of concerns about the state budget getting balanced now and in the future, but not because of concerns about too much state borrowing.
The bonding bill authorizes general obligation bonds. What are those?
General obligation bonds are based on the issuer's ability to repay the debt obligation through taxation or revenue from projects. The issuer doesn't need to pledge any assets as collateral.
Are there other kinds of government bonds?
Yes. There are revenue bonds, which are bonds supported by a dedicated revenue source. For example, bonding for 911 emergency services. A surcharge is added to telephone bills to make payments on the bonds.
Then there are appropriation bonds. These are bonds supported by a general fund appropriation. Appropriation bonds have been used to fund housing programs by the Housing Finance Agency and to build the University of Minnesota's Gopher Stadium. In those cases, another entity issues the bond. But the bonds are supported by a state general fund appropriation.
Appropriation bonds and revenue bonds carry a slightly higher interest rate because they are less secure. They are backed by the state but there is no guarantee that payments will always be made. In the case of revenue bonds if the revenue source goes away, or in the case of appropriation bonds if the state appropriation is repealed or reduced, payments for the bonds may be in question.