Minnesota’s Dollars and Sense

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John Tuma’s Capitol Update – the Pre-Session Version

“This place is now feeling the pressure of hard times… they have not found bottom yet…they have recently voted to loan the credit of the State for $5,000,000 & have thus hung a millstone around their neck, which they will doubtless have to bear for [m]any years to come…”

John P. Bardwell
Agent of the American Missionary Association
From St. Paul on May 7, 1858*

This is one of my favorite nuggets of historical gold I found tucked away in the Minnesota Historical Society records that I have cited before.  It’s a very frank and stark description of Minnesota’s financial condition at the beginning of its statehood.  John P. Bardwell was a Congregationalist minister who just arrived in Minnesota soon after its acceptance into the Union.  He was passing through the Capitol city on his way to serve as a missionary to the Ojibwe Indians near Leech Lake.  He had a deep conviction for social justice.  His home in Ohio was part of the Underground Railroad and, while working to free blacks, he was captured and beaten in Mississippi by a mob. 

This veteran of the Christian social movement of the time was not impressed by the wild pioneer optimism of land speculators and railroad enthusiasts gripping our state.  Bardwell’s report back to his missionary society regarding the economy in Minnesota painted a very bleak picture as the infant state was still reeling from the panic of 1857.  Just before the great economic crisis of 1857, the state was burning with the pioneer fever of land speculators.  Land speculators ran up debts like drunken sailors with dreams of great riches on the western frontier.  On August 24, 1857, at the height of this land speculation frenzy, the Ohio Life Insurance and Trust Company failed in the East, which sent a shockwave throughout the nation’s financial institutions, wreaking havoc on the nation’s economy. 

Minnesota was hit extremely hard with nearly all of its banks collapsing. Within a year Minnesota’s population dropped almost by half.  In order to stem the slide, the Legislature came up with a scheme of floating a $5 million loan on the state’s credit to enhance the development of railroads with the hope of spurring its economy.  Unfortunately, the scheme was a bust and the words of the frugal missionary Bardwell were prophetic.  The infamous “Five Million Loan,” as it would later be known, did become a millstone around the neck of the state for the next five decades as the state struggled to pay off the obligation without any railroads ever being built.

Even though Minnesota was born with a significant financial millstone around its neck, it did mature into one of the most financially prudent states in the nation in managing its debt.  As Minnesota has struggled through one of the greatest financial downturns since the Great Depression, it has maintained its top rating in the financial markets.  Nonetheless, this present daunting financial crisis is casting a huge shadow over the coming legislative session.  Despite the budget trimming that occurred last session, expenditures are still outpacing our revenue.  As a result, the 2010 Legislature will have to open up the budget again to take care of an additional $1.2 billion deficit.

Therefore, the budget crisis adds greater difficulty to this even-numbered year biennial session which in the past has traditionally focused only on minor policy initiatives and passage of the capital investments bill.  The Minnesota Constitution does not allow the state to enter into foolish financial schemes similar to that described by missionary Bardwell in 1858.  The Constitution now limits the state’s borrowing to only capital projects like state buildings or purchasing land.  In order to maintain our top financial rating, Minnesota has developed very stringent guidelines regarding the level of our debt.  One of the chief guidelines was only 3% of our general fund expenditures could be dedicated to debt service.  Unfortunately, with the huge economic downturn, if Minnesota were to honor this restriction it would not be able to do a capital investments bill this session. 

Given the desire to create jobs by the Legislature and the Governor, it was not an option to skip providing additional money for critical state capital investments.  Last year’s budget authorized spending that would have allowed for $728 million of additional debt service in 2010.  Not wanting to ignore our standards and risk lowering our excellent credit rating, the state’s fiscal people came up with an excellent solution: change the standards.

Last week the Governor outlined new standards for the level of debt the state can carry for our capital investments.  The central standard is that the outstanding principal cannot exceed 3.25% of the state’s personal income.  This would give sufficient room for the state to have a bonding bill in excess of $1 billion.   On Friday of last week, the Governor released his recommendations to the Legislature.  Even though his new guidelines would have allowed him to go well beyond a billion dollars in general obligation bonds, the Governor only recommended $684 million. 

Even though his total bonding bill was low, he did honor one of the environmental community’s key positions of keeping the percentage of funding for environmental projects in the bonding bill at the 10-year average of 22.2%.  The environment and conservation provisions of the Governor’s proposal contained almost 24% of the money going to traditional conservation and environment programs.  Unfortunately, some of the focuses in the Governor’s plan overemphasize flood mitigation and his transportation recommendations lacked any real long-term vision for an integrated transportation system within the state. 

With the new standards in place and the Governor’s recommendations received, the 2010 Legislature is gearing up to pass a capital investment bill as soon as possible.  Several legislative leaders have indicated they want to have a final package on the Governor’s desk by mid- to late February.  As a result, individual finance committees are already hearing over $3 billion in requests from agencies and local units of government even though the legislative session has not officially started.  The first day of session is not until February 4.  Fortunately for the environment community, several of our programs preserving critical habitat, building wastewater treatment facilities, and acquiring parks and trails clearly fit under the definition of a capital investment and it has become a significant source of our traditional funding.  Therefore, in each of the capital investment bills, the environment community has competed with prisons, schools, roads and other state construction projects for a piece of the bonding pie. 

A joint committee of both the House and Senate environment finance committees met this week to hear the various proposals.  MEP had the privilege of testifying before this joint committee, where our Executive Director Steve Morse testified to the importance of this bonding bill.  Morse stated, “The constitutional amendment language is clear.  Amendment dollars may not be used as a substitute for existing funds to solve short-term state budget problems.  To keep true to the Legacy Amendment, we seek that long-term conservation bonding investments for clean water, wildlife habitat, natural areas, outdoor recreation and land conservation remain at 22.2 percent, the 10-year average for these projects.”  It seems from the discussion in committee that the Legislature will work to strive to also honor the language of the Constitution.  To learn more about each of the projects proposed by MEP members, you can view them at www.outdoorlegacy.mn/content/legislation.

The good news is that the Governor and Legislature have taken the message from the voters contained within the Legacy Amendment seriously.  Hopefully old John P. Bardwell would have a less pessimistic view of the Legislature of 2010 when it comes to careful financial management.  Unfortunately, all the safety valves and reserves within the budget are gone, which will make for a very challenging session in these “hard times,” but at least the capital investment bill is off to a good start for the environment community, thanks to the voters’ leadership in adopting the Legacy Amendment.

*M391, Roll 1, American Missionary Association, Minnesota Files, 1847-1882, Minnesota Historical Society Library.

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