by Steve Timmer

Dec 9, 2012, 9:30 PM

What if you created a half a billion in debt

But nobody owed it?

Everyone is SO worried that the e-tabs revenue is coming up short. But never fear. That revenue has nothing to do with repayment of the yet-to-be issued stadium bonds.

What, you say? Of course it does!

No, my friends, it doesn’t.

How can that be? How to pay for the stadium was the talk all session!

That may be, but e-tab tax revenue goes into the general fund of the state, not into a dedicated fund for the repayment of bonds sold to pay the state’s share of the stadium’s construction costs. Sure, it’s an accounting item on the state’s books, but nothing more.

How do the bondholders get paid?

(It should be apparent to long-time readers by now that I miss the Grasshopper.) The bondholders will get paid with an annual appropriation by the Legislature. That’s why they are called, in Julie and Morrie’s deathless prose, “appropriation bonds.” If the e-tab tax revenue comes up a little short, well, the Lege will just have to gross it up for the bondholders.

 But the bonds aren’t the general obligations of the state; it says so right in the stadium bill. Couldn’t the Legislature just tell the bondholders to go fish?

Well, theoretically, I suppose that’s true. But imagine what that would do to the state’s credit rating. In bond houses everywhere, bonds from Minnesota would have a new name: “toilet paper.” It really had to be done this way, because who would buy bonds based on just an uncertain, unknown, and really unknowable, revenue stream? And general revenue bonds were a pipe dream.

It is funny that you need three fifths of the Legislature to pass a bill to construct a new building on a MNSCU campus, or a new civics center in Rochester — entirely public buildings — but by the narrowest of margins a bill was passed by the Legislature and signed by the Governor that puts the state — effectively — on the hook for its (and Minneapolis’, too) share of the stadium expenses on the theory that a doubtful and unproven revenue stream to keep the state flush.

Here is a recent report by Minnesota Management and Budget (MMB) on Minnesota’s debt, both outstanding and authorized.

Debt Capacity Forecast November 2012

The sober folks at MMB recognize the stadium bonds for what they are: “tax-supported debt.” When issued, the stadium bonds will be half a billion out of about six billion dollars in total “tax-supported debt.”

That’s a material percentage of the total, a total that includes all of the general obligation debt of the state: all of the highway projects, other infrastructure projects, housing assistance, everything.

MMB says, “It’s okay; we can afford it under the Capital Investment guidelines established.” And apparently so. But as you can also see from the report, there is remaining only 1.2 billion of additional debt capacity under the same guidelines. Since the debt guideline is based on 3.25% percent or less of state personal income, the e-tab tax revenue doesn’t even factor into it, anyway. And you can be pretty certain that the percentage wasn’t plucked from thin air, but rather is based on rating agency considerations and discussions with them.

There are a couple of small “blink on” taxes that are supposed to kick in if the revenue from e-tabs fall short, but they are small, and they wouldn’t affect the remaining debt capacity, either.

The 1.2 billion dollar figure will change and — we hope — grow as other bonds are retired and state personal income increases. But as big an item as it is, the issuance of the stadium bonds is going to affect and limit bonding decisions in Minnesota for a long time.

The use of appropriation bonds — this isn’t the first time the state has used them, as we’ll see — encumbers the state long term, and limits the acts of future legislatures in a way that evades the constitutional three-fifths vote requirement for general obligation bonds.