Bonds

Minnesota lawmakers ended their 2023 session after passing a two-year budget with new funding for schools and social services, a $2.6 billion capital package, and a tax package that raises some taxes and fees on top earners and corporations while providing rebates for others and paying off debt for the NFL Vikings’ stadium.

The budget uses much of a $17.5 billion surplus. The final budget was built on the state’s revised February economic forecast that marked a change from recent history in that it incorporated inflation into the projections.

Inflation raised projected spending by $1.4 billion in the next biennium while revenues were held steady. About $12.5 billion of the surplus had been carried over after it went unspent due to political divisions.

The capital budget, known as the bonding bill, stands out as the state’s largest ever. Lawmakers typically tackle the bonding bill in even years with the biennial operating plan the top focus of the odd years, but previous packages stalled over the last two years amid political divisions.

The November election altered the landscape. Gov. Tim Walz, a member of the Democratic-Farmer-Labor Party, won a second term. DFLer’s retained the House and the GOP lost its Senate majority, smoothing the path for Walz and his fellow Democrats to pursue their agenda.

“The work we’ve done this session will make a generational impact on our state – it will lower costs, improve lives, and cut child poverty,” Walz said in a statement. “We’re going to put resources behind the educators that teach our children. We’re going to rebuild our roads. And we’re going to give money directly back to Minnesotans who need it most, whether through direct checks or the child tax credit.”

Republican members complained that they were left out of negotiations and slammed the level of new spending and tax hikes. “It’s stunning that Democrats are still raising taxes by billions of dollars even though we have a $19 billion surplus,” Sen. Andrew Mathews, R-Princeton, said in a statement.

Spending rises by nearly 40% in the $72 billion budget compared to the current $52 billion spending plan that covers the biennium through June 30. State officials stressed that much of the increase focuses on one-time items, so structural balance is maintained.

The budget directs an additional $2.2 billion toward kindergarten through 12th grade public schools. The state going forward will index the per pupil formula to inflation although it’s capped at 3%. The budget spends an additional $1 billion on human services, housing, and the environment.

The transportation package in the budget raises the gas tax indexing it to the rate of inflation with a 3% cap and levies a 50-cent fee on deliveries that exceed $100. The gas tax change will lift the current rate of 28.5 cents per gallon by five cents by 2027 and generate $155 million over two years.

The budget’s tax package provides $3 billion in tax relief through one-time rebates and by hiking the tax credit for lower income families. The budget relies on an additional $1 billion from a tax change for top earners or on investment income of more than $1 million and a tax change for corporations on their international operations.

The tax package pays down state bonds issued to finance construction of a new stadium for the National Football League’s Minnesota Vikings and allows 36 cities or counties to seek voter approval for a local option sales tax after a two-year moratorium ends.

Local city and county governments are in line for an infusion of $300 million for public safety spending with another $80 million hike in local government direct aid.

Sales taxes in the Twin Cities metropolitan region will rise by .25% to pay for housing issues while Metro transit would receive a boost from a .75% sales tax that’s expected to raise about $440 million annually. Local counties would also benefit from the tax.

The $2.6 billion capital budget relies on $1.5 billion of borrowing with the rest being funded with cash. One bill, HF669 , authorizes $1.3 billion of general obligation borrowing to be repaid with general funds and $219 million of borrowing that would repaid with transportation funds. Another $225 million of general funds goes toward the package. The separate HF670 authorizes $851 million in general fund cash for more than 190 projects.

New general obligation bonding authority requires a three-fifths majority and Democrats were able to win GOP votes by agreeing to their demands to send $300 million to nursing homes.

Walz had proposed earlier this year a $3.3 billion capital package and earlier this month Democrats said they would pursue a cash-only package if they couldn’t secure needed GOP votes. The state typically taps its bonding authorization for capital spending in a sale in late summer or early fall.

Lawmakers dropped a requirement on nursing staff levels from a nursing-related bill. Minnesota-based Mayo Clinic had threatened to cancel $4 billion in planned investments if the state moved forward with the measure. Lawmakers exempted the system but that led to other pushback and ultimately the staffing rule was dropped.

The legislature didn’t pass a funding request from the University of Minnesota for aid that would pave the way for its separation from Fairview Health Services.

The university has put a $950 million price tag on the cost to acquire and operate its flagship academic health care facilities now operated under an affiliation agreement with Fairview which plans to merge with South Dakota-based Sanford Health. Walz and lawmakers suggested a special session could be held later this year to deal with the request.

Lawmakers did pass a measure that if signed by Walz would impede the merger unless it sheds the university-related assets. The bill prohibits out-of-state entities like Sanford from owning university facilities.

The legislation also gives Attorney General Keith Ellison’s additional powers in the office’s regulatory review of mergers over anti-competitive practices. Fairview said after passage it would continue to pursue the merger proposal and would comply with the law if signed by Walz.

With the stadium bond reserve expected to grow to $366 million in the current biennium and reach $678 million in the next, Walz had proposed retiring later this year the outstanding bonds issued for U.S. Bank Stadium ahead of the scheduled 2043 maturity. The move would save $200 million in interest.

The state sold $462 million of appropriation bonds in 2014 to cover most of its $350 million contribution and Minneapolis’ $150 million contribution toward the $1 billion project after establishing a new form of gambling, electronic pull tabs, to help repay the appropriation-backed bonds. Revenue has surged beyond expectations allowing for the early pay off.

The measure in HF1938 taps the current reserve account to pay off the bonds and then repeals the reserve account and transfers future funds to the general fund. It also repeals payments to the state from 2016 to 2020 from Minneapolis that covered its share of the public funding and reduces local sales taxes retained by the state.

The state carries triple-A ratings from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings after a Moody’s upgrade in July.

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