Minnesota 2020 Journal: When it’s Better to Borrow
If everyone waited until they could pay cash for a home almost no one would own a house and Minnesota’s economy would be weaker and worse. The same logic guides government capital investments in public infrastructure. If we waited until we could pay cash for roads, bridges and buildings, we’d have very few roads, bridges and buildings.
The last major item in Minnesota’s 2014 legislative session was the Capital Investment Omnibus Bill, better known as the Bonding Bill. It’s the mechanism that state policymakers use to borrow money by issuing and selling state bonds to finance public infrastructure construction. Rather than pay additional fees to borrow money from a bank, the state raises cash directly from the marketplace.
Bonds are financial instruments. They’re promises to pay back borrowed money over a relatively long term period. Bonds, especially those issued by stable, well-managed state governments, are widely considered extremely safe investments. They don’t yield stock market-type financial returns but then they don’t carry stock market-type risks. Bonds’ investment attractiveness flows from the stable repayment schedules.
States use bonds to finance public infrastructure, not public programs. Program funding is a function of tax and budget policy, evaluated through the state’s economy. State program budgets are the policy-driven plan for addressing public need. And, as we’ve all been reminded during the Great Recession and laconic recovery, public needs can change very quickly. That’s also why bonding generated funds are used for infrastructure investments but not for program. Infrastructure has, by design, a long-term perspective serving long-term needs. Program engages the here and now.
Why, when interest rates and construction costs remain low, did state policymakers cap state bonding, supplementing it with generated cash revenue? They used short term, program money to make long-term investments. Not only is Minnesota missing the opportunity to leverage greater economic growth from optimal bond and construction market conditions, it’s missing the good from committing newly-realized public revenue to reversing program investment decline.
Let me back up. In fact, let me back way up. Government is an expression of the public’s desire for order, security and stability. We manage government by electing leaders to limited terms in office, investing them with the authority to achieve the public’s goals. People always want more than collective resources can deliver. Leading government requires artfully managing public expectations. Economic swings especially complicate expectation’s artful management.
Minnesota’s constitution requires a balanced state budget, matching forecast public revenue with projected public spending. When economies slow, public revenue generated by tax receipts fall as people spend less money. That in turn compels budget cuts in order to maintain balanced budgets. States could borrow money to compensate for reduced tax revenue but that choice is rarely well received. First, bond market analysts react negatively, lowering the State’s bond rating and increasing borrowing costs. Borrowing long-term investment money to meet short-term program needs is seen as risky behavior. The preferred alternative is always a combination of tax increases and spending cuts.
In the past ten years, Minnesota deviated from this pattern by refusing to raise state taxes until last year under Governor Dayton’s leadership. During the worst recession since the 1930’s Great Depression, conservative policy leaders refused to raise taxes, insisting on budget cuts alone. As a result, Minnesota cut program spending deeper and with greater negative consequences than in previous recessionary periods. Minnesota has a lot of ground to make up in every policy area, from schools to roads to healthcare. But, Minnesota didn’t spend bonding money to offset budget cuts.
Minnesota maintains the second highest bond rating. We could borrow up to $2 billion without lowering the rating. This year, policymakers agreed to authorize just shy of $900 million but added about $280 million more in public revenue generated cash to bump infrastructure spending up to $1.1 billion. While I quibble with the $900 million, it’s the $280 million that chaffs.
Appropriating General Funds for capital investment projects pits, for example, improvements to the Mayo Civic Center against Minnesota’s schools. Civic centers are infrastructure like roads and bridges. It’s a long-term economic investment meriting construction financing from General Obligation bonds. Paying for it with General Fund dollars—cash—means prioritizing that project over needs, such as school funding. Or affordable healthcare funding. Or property tax relief. Policymakers should’ve paid for the facility project with GO bonds. They didn’t, choosing instead to spend GF cash.
Minnesota is not a house. We’re a state with a state’s complex needs, goals and ambitions. We need smart budgeting and management policy to meet those ambitions. We need to invest the public’s resources to achieve the best, most productive results. It’s a proven, capital idea.