Perfect Market for Borrowing and Building
Part one of a two-part series.
Little noticed amid the celebration of an unexpected state budget surplus projection was more good news for Minnesota's economic future: nearly $2 billion of general obligation borrowing capacity. Budget officials arrived at this figure based on stringent guidelines adopted during Gov. Tim Pawlenty’s administration.
In these days of sovereign debt crises stretching from Athens to Washington, some may consider more public borrowing a fast road to ruin.
It's not when a state like Minnesota can build on its tradition of prudent fiscal management to accelerate recovery from the economic doldrums and set the stage for stronger prosperity to come.
Tapping the state's highly rated credit is especially advisable at a time of record-low bond interest rates, declining infrastructure quality and catastrophic unemployment in the construction industry.
Unlike the crushing national debts of Europe and the proportionally lesser U.S. federal debt load of $15 trillion, not a penny of Minnesota’s $6 billion in outstanding capital bonds was used to plug government operating deficits. Instead, our taxpayers continue to benefit from the long-lasting public facilities built with bonding as they pay off the costs over decades. This is a sustainable route to growth employed by countless private businesses.
Meanwhile, as cash-strapped European countries have been scrambling to raise money at interest rates above 6 and 7 percent, Minnesota recently sold $769 million in general obligation bonds for capital projects at 2.82 percent, the lowest rate in state memory. Even a recent small downgrade of the state's credit rating from gold-plated AAA didn’t cool investors’ ardor for Minnesota bonds.
"The market is particularly favorable at the current time," noted Kristin Hanson, the Minnesota Management and Budget official who oversaw the bond sale. This won't last forever, though. That's why a robust capital investment bonding bill should be at the top of the Minnesota Legislature's 2012 agenda. There's no better time to preserve and improve state college and university campuses, mitigate flood hazards, fix bad local roads and bridges and attend to numerous other public infrastructure needs.
Would that bust the state budget? Hardly.
On December 1, Management and Budget forecast the total cost of servicing tax-supported bonds during the fiscal year that ends June 30, 2012, at $301.6 million, nearly $100 million less than in any year going back to 2006. It's less than 2 percent of the state budget, and it even assumes authorization of $775 million in capital borrowing next year.
In fact, Minnesota could double that investment and still remain well within the Pawlenty-era guideline of holding state debt supported by taxes to no more than 3.25 percent of annual state personal income. It stands at 2.45 percent now, having declined from 2.56 percent since the previous debt capacity report on Feb. 28 this year.
There's no need to go overboard on borrowing, however. Preliminary applications for 2012 bonding from state agencies and local governments total $2.3 billion, at least $1 billion less than in recent years. Policymakers should fund up to half of the dollar requests while economic conditions remain historically ripe to counteract job losses from the housing crash and reduced government spending on operations.
More than $400 million of the requests are for asset preservation and rehabilitation of public facilities at college campuses, National Guard installations, prisons, the State Capitol and elsewhere. These projects should be among the first approved. Other worthwhile proposals include a new University of Minnesota health clinic, additions and renovations to many other state campus buildings, a veterans home expansion, new sex offender lockups at St. Peter, intercity passenger rail development and local roads, bridges and transit.
Authorizing this work, and the thousands of well-paid private sector jobs that go with it, should be done early in the legislative session that begins Jan. 24. That way, many of the projects could get underway during the 2012 construction season.
This year's $500 million bonding bill wasn't enacted until late July, and only $1 million was under contract by late November.
That’s not unusual in a state where bonding is often held hostage as a bargaining chip in budget negotiations that last into May or beyond. But as recently as 2010 Pawlenty signed off on $680 million in capital investments in mid-March. That's smart policy that has helped keep Minnesota's overall unemployment rate about 25 percent below the national average in the Great Recession's slow-growth aftermath.
But construction workers still bear the brunt of joblessness in Minnesota. Their double-digit unemployment dwarfs the state's overall 5.9 percent rate (this was updated from an earlier version). More than 40,000 Minnesota construction jobs have dried up since 2006.
"We're by far the most depressed industry sector," said Kyle Makarios of the North Central States Regional Council of Carpenters. "We have 3 percent of the employment, but one-quarter of the unemployment. You can't focus on jobs without focusing on the construction industry."
In this tough economy, though, Minnesota is ideally situated for capital investment at record-low interest rates that will employ the hardest-hit jobless, repair and upgrade vital public facilities and set the state on the road to full recovery.
Read Part 2: Conservatives Who Get It on Bonding and Infrastructure.