Bonding division learns the state is well within debt-capacity guidelines

As the House Capital Investment Division begins considering projects around Minnesota it may help fund this session, members learned Thursday the state is on sound financial ground to issue the bonds it uses to do so.

Minnesota Management and Budget Assistant Commissioner Jennifer Hassemer delivered a presentation on the state’s debt capacity – its ability to pay back the money it borrows in a timely manner – and said Minnesota is well within the guidelines that govern the bonds sold to fund capital improvement projects.

MMB is required to give lawmakers a debt capacity forecast twice each year. The November 2018 forecast showed the state is obligated to repay an outstanding principal debt of $7.8 billion. That includes $6.3 billion for general-obligation bonds and $1.5 billion for other tax-supported obligations.

The Capital Investment Guidelines created by MMB in 2009 provide benchmarks the state can follow to signal to rating agencies and the capital markets that “a government is well managed and likely to meet its debt obligations in a timely manner.”

Hassemer said the guidelines are also important because they can communicate policy goals, provide guidance for lawmakers and “demonstrate a long-term commitment to capital funding for the state’s important needs.”

The first compares the debt the state currently owes to its personal income and calls for the amount of debt the state has sold not to exceed 3.25 percent of the state’s personal income. Hassemer said the percentage currently stands at 2.4 percent.

The second guideline also compares debt to personal income, but in this calculation the total amount of authorized state debt is broadened to add debt that has been authorized, but not yet sold. It includes the debt in the first guideline but adds “moral obligations” and equipment capital leases. Under this guideline, the state is not to exceed 6 percent of personal income. Hassemer said the state was at 3.8 percent in the November forecast.

While the first two guidelines determine the capacity for the state to take on additional debt, the third measures how quickly the state pays off its general obligation bonds. The goal is not less than 40 percent paid in five years and 70 percent paid within 10 years, and the forecast found percentages of 42.1 and 73.3 respectively.

How large can this year’s bonding bill be to stay within MMB guidelines?

“Under our current capital investment guidelines, the Legislature could authorize almost $3.5 billion in new debt this session,” Hassemer said. “I will caveat, again, that this is not a recommendation to the Legislature, it is merely showing where we fall within existing guidelines.”

Division Chair Rep. Mary Murphy (DFL-Hermantown) was pleased with the news.

“Those are really good numbers … We’ll have to have conversations about this,” she said.

Responding to question from Rep. Jack Considine Jr. (DFL-Mankato), Hassemer said Minnesota “earned back” its second AAA rating last summer, which saves the state millions of dollars in interest costs.

Hassemer said those ratings “translate into the lowest borrowing costs possible for the state.”