Minnesota has a love affair with debt. According to Gobankingrates.com, Minnesotans carry the seventh highest debt per capita of any state’s residents at $113,455.30. That includes everything from home and car loans to credit cards.
In fact, less than one in four Minnesotans are mortgage free, and more than 6% owe more than $300,000 on their homes. Less than half have no credit card debt, and 5% of Minnesotans owe more than $10,000.
That trend carries over to our state’s politicians. Governor Tim Walz has just proposed the largest bonding bill in state history. On Jan. 15, Minnesota Management and Budget Commissioner Myron Frans announced that the governor wants to spend almost $3.5 billion on infrastructure projects.
The governor rolled out his plan under the guise of being fiscally prudent since he had about $5 billion worth of requests, including $3.7 billion from state agencies and $1.3 billion from local governments. However, the plan looks a lot like his effort a year ago to raise the gas tax 20 cents per gallon.
Negotiating 101 suggests that one needs to start high and then settle in the middle. However, if one starts too high, the other side may just walk away and determine a course of action on its own. That’s what happened with the gas tax, and that’s what could happen here — except that few state legislators have qualms about increasing debt.
The governor’s plan calls for issuing $2 billion in general obligation bonds plus another $600 million in appropriation bonds, general fund cash, trunk highway bonds and user financial bonds. Walz also plans to use those funds to leverage $887 million in federal, local and private funds for the projects.
A look at the state’s debt history is revealing. In fiscal year 2006, the state’s debt service cost $401 million. By 2012, it had dropped to $301.6 million. Then the state took on two large projects, the refurbishing of the state capitol building and the construction of the Vikings stadium. By 2014, the debt service cost had risen to $853.9 million. Last year, it was $915.4 million.
Current projections have debt service costs passing $1 billion in 2024, but with $2.6 billion in bonding being requested this year, that may be low. In his latest debt capacity report on Dec. 5, Franz lowered his assumptions for capital budgets from $800 million in 2015 to $755 million now for general obligation bonds. One month later, the governor is asking for two and a half times that much.
All of this has taken place in spite of the fact that Frans’ department refinanced most of the state’s debt at lower interest rates.
At the Legislature, both parties are fans of bonding. To bond, the Legislature needs a supermajority of 60%, something one party rarely has. That helps prevent all of the money being spent only in the districts represented by one party. However, it also increases the size of the overall bill because in order to pass, it needs to include more projects so more legislators can claim credit for bringing home the bacon.
It should also be noted that $1.4 billion of Walz’ requests are to address deferred maintenance, which, if that is what it truly is, is otherwise known as “bad management.” That’s not the governor’s fault; he’s only been in office for a year. The budget proposal notes that an additional $2.9 billion in deferred maintenance remains unaddressed.
The University of Minnesota asked for $2 billion for deferred maintenance and Walz’ proposed $125 million for it. The Minnesota State system asked for $1 billion and Walz’ proposed $142.5 million. It may be unfair to ask today’s college students to pay for years of building mismanagement, but well managed organizations don’t defer maintenance that needs to be done.
Meanwhile, the state budget is projecting a $1.3 billion surplus. its reserve accounts are now at the target level set by law, almost $2.4 billion. The interest paid on a $1 million bond at 5% over 20 years is $583,893.77. Do the math, and it doesn’t take a rocket scientist to figure out that the state could save taxpayers millions of dollars over those 20 years by using the surplus to fund infrastructure projects instead of bonding.
Of course, the world champion of spending money it doesn’t have is the federal government. Here again, it takes bipartisanship of the worst kind. Republicans constantly push to lower taxes and Democrats constantly push to increase spending. So, what happens? They compromise by doing both. Now the national debt is increasing by $3 billion per day.
Meanwhile, the crew of this fiscal Titanic, who are being paid $174,000 annually, are busy pelting each other with the olives from their martinis while arguing about who is most responsible for the gaping hole in the side. The passengers cower on the decks, hoping someone will repair the gap before granny is thrown into the seas without her Social Security and Medicare life raft.
Minnesotans may think their state is relatively well-managed financially, but when the deadbeat federal government runs out of creditors, debt of all kinds — personal, state, national — is going to be very painful. Each of us and especially our governments should be doing everything possible to eliminate that burden.
Tom West, now retired, is the former general manager of this paper. Reach him at email@example.com.