Capital Bonding
My colleague Rep Paul Gardner shared the following blog about Capital Bonding and, with thanks to him, I would like to share it with you.
Every two years the Legislature and Governor work on this bill to provide funding for publicly owned buildings, property, and land. In particular, state agencies have buildings or property that are in need of repair, renovation, or replacement. Our state colleges and universities tend to have a large request because they have a lot of buildings. To be "bondable" the project has to be publicly owned, be of state or regional significance, and be a capital project--meaning it has to be "bricks and mortar" and not for ongoing operation costs. The state raises money for these projects by selling general obligation bonds on the bond market. The state then pays the debt service to pay off the bonds over time.
Many people have written me assuming that when the Legislature passes a bonding bill that the amount of the bill is actually added dollar-for-dollar to the budget. For example, the Senate just passed a $1 billion bill and someone said that they added $1 billion to the deficit. That's not the case. In our current budget, we will now just pay the debt service on the $1 billion, which is in the tens of millions or so.
The state agency Minnesota Management and Budget (MMB) starts the process by asking public entities to submit requests. Usually the requests are something like five times greater than funding available, so MMB winnows them down and eventually the Governor's office submits a proposal to the Legislature with projects he wants. This year the Governor submitted $685 million worth of projects and those projects were mostly for state agencies and higher education institutions. The House and Senate are likely to approve a bill in the $1 billion range. According to staff, this difference of $315 million would increase our debt service for FY2010 by zero and by just $2.5 million in FY2011.
The bonding bill is often touted as a jobs bill. It is true that the private sector creates most jobs, but in bad economic times when the private sector is not hiring, government can spur job growth by spending on public projects that are generally needed anyway. (This is a basic tenet of Keynesian economics.) Right now, construction costs have declined considerably so many of us believe that if we have a larger bonding bill this year it does two things: we get more projects done for less money and we can spur additional job growth albeit temporarily. A general rule of thumb is that for every $100,000 in bonding projects, you get one job. (Someone gets paid for doing the work, but there are also costs to fuel, supplies, construction materials, etc.)
So if we pass a $1 billion bonding bill instead of the Governor's proposed $685 million (a difference of $315 million), we could see the creation of 3,150 additional jobs for just an additional $2.5 million during the next fiscal year. At least in the short term, that's $793 per job when we need to put people to work. WOW.
How do we figure out what an acceptable debt level is? Well, there is no law that limits our debt level, but several decades ago, Governor Perpich used three percent of the general fund budget as a guideline and the state has pretty much stuck to that level.
Moody's (an agency that sets bond ratings) said this about our debt management: "Minnesota's debt levels have historically been a neutral-to-positive part of the state's credit profile. The state's debt issuance is highly centralized and controlled, with the bulk of bonds issued carrying the full faith and credit pledge of the state. Minnesota's metrics have tended to place the state about average or slightly better among the states for debt issuance. Moody's 2009 State Debt Medians Report shows that Minnesota ranks 25th in debt per capita and 32nd in debt as a percent of personal income, largely a result of the state's increasing personal income levels."
