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Veto Revives Senate Building Controversy

Wednesday, August 9, 2017  
Posted by: Laura Fenstermaker
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From Minnesota Lawyer

Earlier this summer S&P Global Ratings placed the state’s debt on credit watch due to uncertainty over the state making certain debt payments after Gov. Dayton line-item vetoed funding for the Legislature.

The Legislature — arguing the veto violated the state constitution’s separation of powers clause — recently won a legal challenge to the veto in district court. Dayton, however, will appeal the ruling to the Minnesota Supreme Court, and so the legal wrangling continues.

Minnesota’s credit has dipped in the past after tough budget battles, but this time the threat to the state’s credit rating isn’t just about an unsatisfactory budget agreement.  It also ties into the controversial manner the Democrat-controlled Legislature and Gov. Dayton chose to finance the Minnesota Senate Building (MSB) back in 2013, which itself ties back to a wrongheaded 2012 ruling by the Minnesota Supreme Court that set the stage for Democratic legislators to circumvent built-in constitutional protections for taxpayers.

In short, all branches of government share in the blame.

The veto threatens the state’s credit because, on top of eliminating funding for legislative salaries, the veto eliminated funding to pay the debt on the new MSB. Credit analyst Eden Perry, as reported by Barron’s, explains:

In our view, the governor and legislative leaders have politicized the appropriation in their dispute over the budget. In that sense, the lack of agreement over the lease appropriation reflects unfavorably on the state’s willingness to fund all of its debt service payments despite its ability to pay remaining very strong.

This credit problem would have been avoided if the MSB had been properly financed in the first place.

Big expensive buildings are usually funded through general obligation (GO) bonds that are backed up by the full faith, credit, and taxing powers of the state of Minnesota.   That’s how the Legislature initially proposed to finance the MSB.

But they ran into a problem.  The state constitution requires a three-fifths vote “to acquire and to better public land and buildings.” That higher threshold required Republican votes, and Democrats could not get a single Republican on board.  Republicans viewed the MSB as an extravagant waste of taxpayer dollars.  (Voters seemed to agree as Republicans took back control of the House in the 2014 election.)

Without enough votes to authorize a GO bond, Democrats turned to a lease-purchase arrangement to finance the MSB.  A lease-purchase arrangement is basically a rent-to-own scheme where bonds are sold to fund construction and the bondholders technically own the building until the end of the lease.

Democrats may not have ventured forward with this creative financing arrangement if it weren’t for a recent Minnesota Supreme Court ruling that basically allows the government to borrow however much it wants and for whatever it wants, so long as the debt is not guaranteed by the full faith, credit, and tax powering of the state.

Practically speaking, both GO bonds and lease-purchase arrangements are public debt.  The state is obligated — i.e., indebted — to make regular payments in both cases.

If both are public debt, what sense does it make that GO bonds require a three-fifths majority vote and a lease-purchase arrangement does not?

Not much.  Constitutional limitations on borrowing provide citizens with important protections and they apply to any debt arrangement.  The three-fifths majority vote requirement delivers three particularly important protections.  First, it protects areas of the state represented by the minority from being shut out of capital investments.  Second, it makes any final borrowing bill less political and controversial because it generally requires a bipartisan vote.  Third, it protects the integrity of state finances.

Nonetheless, the Minnesota Supreme Court, without ever discussing these protections for citizens, ruled in Schowalter v. State that constitutional limitations on borrowing apply only to debt secured by the full faith, credit, and taxing power of the state.  Ironically, the case involved the constitutionality of using tobacco appropriation bonds to balance the budget in 2011, the use of which was a factor in the state’s credit rating being downgraded at the time.  No one pointed out how the tobacco bonds temporary fix undermined the state’s financial integrity, something the constitutional limitation at issue is supposed to protect.

The high court ruled this way even though the constitution’s definition of public debt does not refer to how the debt is secured.  Rather, the constitution provides, “Public debt includes any obligation payable directly in whole or in part from a tax of state wide application.”

Justice Alan Page wrote a strong dissent, providing any student of law with some good lessons on proper statutory interpretation. Yet the majority opinion never addressed Page’s arguments.   And they never explained how “any obligation” can mean only those obligations backed by the state’s full faith, credit, and taxing powers.

The courts rightly show deference to the legislative and executive branches of government, but in too many instances, to avoid conflict, the Minnesota Supreme Court fails to hold itself up as a coequal branch of government.

This is a real problem in cases that involve enforcing constitutional protections for citizens.  In these cases, too much deference to the Legislature only shows disdain for citizens.

Today, the citizens of Minnesota are paying a price, in part, due to this dismissive court opinion. There’s the $90 million price tag taxpayers must contribute to purchase the MSB.  But there’s also a price exacted from our civic culture in allowing a big capital project like the MSB to become overly political.  Incredibly, Minnesotans may now have to pay higher borrowing fees as result of the politically charged MSB.

Hopefully, the state’s justices are taking note.


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