Minnesota stalemate leaves bonding and transportation bills in limbo

The fate of Minnesota’s biennial bonding package, matching dollars needed to leverage federal infrastructure dollars, and billions in tax relief funded with Minnesota’s $9 billion budget surplus hinges on whether lawmakers can reach agreements that pave the way for a special session.

Lawmakers at the negotiating table couldn’t overcome all their divisions before the legislature's mandatory adjournment May 23.

The prospects for passage of key pieces of legislation during the 2022 regular session had appeared brighter after Gov. Tim Walz, Republican Senate Majority Leader Jeremy Miller, and Democratic House Speaker Melissa Hortman reached a bipartisan framework.

It called for $4 billion of spending and directed $4 billion in tax relief over three years. The deal also included a $1.5 billion mostly bond-funded capital budget and left billions on the table should the state’s economic picture fade.

“We had a universal agreement that is fantastic for Minnesota. I just think as Minnesotans are out there listening and saying wait a minute, ‘We could have the largest tax cut, we could invest in roads, bridges and education. We could invest in thinking about workforce development for the future. And we could keep money on the bottom line in case the economy turns bad,’” Walz said late last week.

Walz is a member of the Democratic-Farmer-Labor Party which holds a House majority while Republicans hold a Senate majority. Three-fifths super majorities are needed on some bills like ones that authorize new bonding needed to support the capital budget which is known as the “bonding bill.”

Walz, who before adjournment was against a special session, said last week he hoped for an agreement that could lead to limited special session, a frequent occurrence in Minnesota during times of divided leadership.

Democrats say pressure is on the state to act in the coming months on a transportation budget that provides funding allocation needed to ensure federal matching dollars are received from routine funding and those in the Infrastructure Investment and Jobs Act.

“We cannot leave the federal money from the largest infrastructure package in 50 years on the table,” Walz said in published interviews last week.

The state expects at least $7 billion from the federal package for roads, bridges, public transit, airports, broadband, vehicle charging stations, and water infrastructure.

Republicans believe the state has authority to leverage existing authorizations to provide needed matches on federal funding. The department said an appropriation is needed on several fronts.

“Failure by the Minnesota Legislature could have several negative impacts on MnDOT’s ability to spend and compete for federal funds,” said Minnesota Department of Transportation spokesman Jake Loesch.

MnDOT’s portion of IIJA funding is on average about $170 million annually with an estimated $315.5 million for the current state fiscal 2022-23 biennium.

“This money flows through the state road construction appropriation in the Trunk Highway Fund, and needs appropriation increases directly from an appropriations bill. The Minnesota Legislature has not yet approved the $315.5 million in requested increases, and as a result MnDOT cannot spend any of that money,” Loesch said.

MDOT estimates that about $40 million is needed in state funding to match these additional federal funds as well as another $20 million for local governments. “The failure to provide matching funds for IIJA grant programs means Minnesota will not compete as well as other states in competitive grant opportunities,” Loesch said.

Minnesota could also lose up to $100M in additional fiscal 2022 funds that are part of the Federal Highway Administration’s August redistribution budget practice. “Not receiving the needed state budget authority could jeopardize this money by the end of September deadline,” Loesch said.

Walz pressed for a $2.7 billion bonding bill, topping the record $1.9 billion bill adopted two years ago. Minnesota Management and Budget said the higher level was affordable based on revenue projections.

GOP negotiators pushed back saying they wanted to focus on repairs and upgrades to existing assets, and officials had struck agreement on a $1.5 billion package that relied on $1.4 billion in new borrowing but no vote was taken.

Republicans were opposed to the level of surpluses earmarked for new spending items but left the door open for potential action on items like the bonding bill and transportation budget during a special session.

“If we do have an economic downturn, I’m worried that agreement did not leave any money on the bottom line,” House Minority Leader Rep. Kurt Daudt, R-Zimmerman, said last week.

Under the budget agreement struck in mid-May, the state would dole out $4 billion in relief through rebate checks and by lowering income taxes for the lower bracket and eliminating the tax on Social Security.

The additional $4 billion in spending would provide $1 billion for education, $1 billion for health care and human services, $450 million for public safety, and $1.5 billion in additional investments. About $150 million of cash would supplement borrowing authorized in the bonding bill.

The package also left $4 billion of expected revenues on the table should the economy tank. The deal tapped into both the current biennial surplus and billions more expected in the next budget cycle. In addition to the surplus, about $1 billion remains from the state’s $2.8 billion share of the American Rescue Plan Act for pandemic relief.

Lawmakers earlier in the session did pass $2.7 billion of funding to replenish he unemployment insurance trust fund and $500 million for a $750 payment to frontline workers.

The state operates on a two-year budget adopted in odd years with the focus in even years on passing a bonding bill so there’s no threat of a government shutdown which has occurred in some years and was cited as a negative ratings factor.

The November election will decide majorities in the legislative and the governor’s office. Walz is seeking re-election.

The state has room to spend more and provide relief after the annual February forecast raised the general fund surplus by $1.5 billion to $9.253 billion for the biennium that runs through June 30, 2023. It’s driven by $1.25 billion in additional revenues now expected while spending is down $270 million primarily in the education and health services budgets. The state issues formal revenue projections in February and November.

State finance and economic officials cautioned that the outlook was clouded by inflation and the Russian invasion of Ukraine that poses new geopolitical risks while the course of the COVID-19 pandemic could also put a dent in the rosy figures.

The state’s November forecast that projected a $7.7 billion surplus marked a dramatic turnaround from a year earlier when red ink driven by the pandemic’s anticipated tax blows loomed.

The tide shifted as it did for many states later in the year as tax revenues rebounded from early pandemic lows and the gap evaporated in the February 2021 forecast when a $1.57 billion surplus was projected heading into budget season.

With the November forecast, the budget reserve was restored to $2.66 billion. The state is operating on a $52.3 billion budget.

The state typically borrows in the late summer. Ahead of its $876 million general obligation sale last year the state won two improved rating agency outlooks.

Moody’s Investors Service moved its outlook on the Aa1 rating to positive from stable. S&P Global Ratings moved the outlook on its AAA rating to stable from negative. Fitch Ratings affirmed its AAA rating and stable outlook ahead of the sale.