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Best Chance for State Investment is Going, Going, but Not Gone

August 15, 2013 By Conrad deFiebre, Transportation Fellow

After more than a decade of state budget crises brought on by so-called conservative fiscal policies, Minnesotans are beginning to reap the benefits of sound government management under progressive leadership.

"The state has a balanced budget, a projected structural balance in the out years, has filled the cash flow and budget reserve accounts and repaid two-thirds of the previous education shifts," Jim Schowalter, the state's chief money manager, said after a Wall Streeet rating agency upgraded Minnesota's financial outlook from negative to stable on July 30. "The recently passed biennial budget did the job to balance a projected deficit without the use of one-time measures."

The move by Moody's Investors Service offers hope for a prompt restoration of Minnesota's customary top bond ratings from all three financial raters, which lowered them a notch in 2011 in response to conservative-driven one-time measures to shore up the state's books. And that should mean better bargains for the state in bond markets as it seeks to address deferred maintenance of public facilities and pent-up demand for new ones that will drive economic growth across Minnesota.

As it was, great interest-rate bargains for state borrowing have been out there ever since the Bush-era financial meltdown of 2008. Unfortunately, conservative Minnesota policymakers were too timid to take much advantage of money on sale for public construction and upkeep projects -- largely motivated by the doubtful philosophy that the best public sector is the smallest one possible.

In the Great Recession and jobless recovery that followed, both employment and the state's capital stock would have been significantly improved with more aggressive bonding that could have stayed well within debt service guidelines issued under Gov. Tim Pawlenty in 2009. But Pawlenty and other conservatives essentially said, to paraphrase the old oil-filter commercial, we won't pay for pressing needs now, and we won't pay for them later, either, if we can help it.

This pound-foolish obstructionism persisted even after last August's $658.5 million state bond sale drew the lowest interest rates in Minnesota history, ranging from 1.02 percent to 2.38 percent for various types of debt. That was at or below inflation, practically free money. But Gov. Mark Dayton's recommended $750 million bonding program was slashed last spring by nearly 80 percent, to $154.1 million in general obligation borrowing, when minority conservatives lined up en masse to deny the necessary 60 percent approval votes.

Certainly, few expected the governor's full request to be enacted in an operating-budget session that is traditionally light on bonding. Still, given the once-in-a-lifetime environment for public credit, the final product was exceedingly pared down, zeroing out nearly everything but flood mitigation and long-delayed renovations of the State Capitol and state veterans home. There wasn't a dime for higher education facilities, transportation or a long list of other needs.

Prospects for robust capital improvements are much better in next year's short election-year session at the Capitol. But the great opportunities of the past few years for low-low interest rates and contract bids are fading. A sale of $478.4 million in state bonds last week (including some authorized years earlier) attracted interest rates of 1.91 percent to 3.35 percent. That's up sharply from a year ago, but still well below historic levels, said John Pollard, spokesman for Commissioner Schowalter at Minnesota Management & Budget.

"The economy is doing better, so the interest rates are higher," Pollard added. "But they're still pretty low and likely to go up in the future. It's better to borrow sooner rather than later. And our needs have piled up."

On the construction cost side of the equation, as well, the hard times that were good for public budgets are a-changin'. Where bids for everything from bridges to fire stations were coming in well under estimates in the past few years, now they often are exceeding appropriations and causing projects to be scratched or delayed, according to a recent Star Tribune report.

Meanwhile, a rebound in private construction combined with migration of contractors to the booming North Dakota oil patch has led to shortages in Minnesota of workers, equipment and materials that is bound to impact public works, too.

We may have let slip away the best chance in generations to build and maintain the excellent public facilities Minnesotans deserve and expect. But the stars are still aligned far better than the period before 2008.

Minnesota's tax-supported debt capacity is more than $800 million, according to an official February calculation of $1.3 billion based on the Pawlenty-era guidelines after subtracting last week's bond sale. It's likely to be significantly greater by next spring with scheduled debt retirement and current strong growth in benchmark state personal income.

The needs haven't gone away and the price of filling them remains discounted. Policymakers next year should grab onto what's left of an historic opportunity to build our shared wealth.

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