Need for a Debt Service Account

The second year of the biennial legislative session mainly focuses on capital investment in the state’s infrastructure and is referred to as the Bonding Session.  Governor Tim Pawlenty (R) unveiled his proposed Bonding Bill two weeks ago to the tune of $965 million.  In the proposal a significant portion, 40 percent was directed at transportation.  This was not surprising in light of the 35W Bridge collapse, but part of the overall $1.09 billion requires a local match.  The state’s self-imposed borrowing rate is 3% of the overall state budget.  This means the amount of money that state can support for debt service consists of existing obligations combined with any new bonds.  This formula resulted in the establishment of the state’s debt capacity of $965 million for 2008.
 
As we begin our assessment of the pending political ups and downs forthcoming this session we have struck upon an idea that may address some of the looming pitfalls.  Our idea is to create a specific Debt Service Account for use in paying off state bonds.  Minnesota has worked long and hard to maintain an AAA Bond rating and in doing so the bonds our state is able to secure bonds at lower interest rates.  This means the cost of our borrowing is lower over the course of time.  Revenue Bonds raise money with an interest is lower than inflation this means its cheap money.  Additionally, we have been able to pay-off our bonds earlier thus saving some costs in the years.  Many Republicans enjoy making long-term purchases on the state’s credit card and extending the obligations on into the future rather than raising taxes to make cash payments in the short-term.
 
Since transportation will the focal point of much that occurs this session, from the confirmation hearing for Lt. Governor Carol Molnau (R), the Victims Relief Fund for the 35W survivors, another attempt to create a stable funding source for transportation in a Transportation Bill and then the Bonding Bill, many of these issues are intertwined.  With that said, it seems that there is a pension at the legislature for creation of stable funding sources through the use of dedicated funding methods.  The proposed Constitutional Amendment for dedication of a portion of the state sales tax, which is expected to pass, being an example.
 
If a Debt Service Fund could be created and it to be supported by some form of revenue we think the state will save money in the long run.  Now we are hearing a number of ideas for revenue enhancements from a metropolitan wide sales tax to an extension of sales tax onto services and not just goods.  If the tax base were to be broadened and more people were asked to pay, but then the rate were to be reduced there might be some political will.  Because Pawlenty is not up for reelection this year he may be open to the suggestion of reshuffling to the deck as it pertains to the tax base.  We know he already opposes the recreation of a fourth tax tier, but since sales tax is a consumption tax he may be willing to consider the concept.
 
Since this is a dedicated funding idea it would take a Constitutional Amendment to implement it.