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Letter: Is state best served by bonding limit?

State government can't do much to revive the flagging economy -- or can it? The constitutional requirement that the state budget be balanced every two years gets in the way of the kind of countercyclical spending that the federal government is contemplating. When revenues fall during recessions, state lawmakers cut spending, even as demand swells for the services that state government provides.

But the Legislature and the Pawlenty administration are at least weighing one small lever to give local economies a lift by authorizing bond issues for building projects. Proponents say those projects create jobs in the short term and economy-supporting infrastructure for the long term. State bonds finance things such as transit lanes, bridges, water treatment plants, college laboratories and building repairs all over the state.

Legislators habitually set their bonding sights higher when the gross state product dips lower. This year, that habit is running into resistance. Shrinking state revenues have already pushed expected debt service requirements past 3 percent of the state's general fund, a guideline set 30 years ago and not breached, until now. If Legislatures through 2014 stick with historically small to mid-sized bonding bills -- $125 million in odd-numbered years, $725 million in the even-numbered "bonding" years -- debt service is forecast to climb to 3.39 percent of the state's general fund budget.

The situation has both legislators and officials at Minnesota Management and Budget taking a fresh look at the 3 percent guideline. They are doing so cautiously, as well they should: Americans are learning to their sorrow the trouble that excessive debt can bring. Through the years, the 3 percent guideline has been a useful restraint on legislators' appetites for building-project pork. Lately, debt service has been one of the fastest-growing parts of the state budget. Removing all restraints on debt now would not be prudent.

But the 3 percent guideline is not the only measure of a state's capacity to handle bonded debt, and may not be the best one. Four other rules guide bonding, including how debt service compares with state personal income and how quickly the bonds mature. None of the other rules are at risk of being broken in the next six years.

What's more, it's increasingly evident that the big bond rating agencies don't put much stock in the 3 percent rule. Minnesota officials announced that the limit has been exceeded, and still had a surprisingly successful $400 million bond sale on Jan. 13. Minnesota's Standard & Poor's AAA rating is intact. State officials say rating agencies look favorably on Minnesota's debt management policies, but they may be more interested in its total fiscal management. Whether or not a state maintains a reserve fund, avoids one-time gimmicks in paying for ongoing expenses, and resolves its political differences without government shutdowns all affect a state's bond rating.

After 30 years, it's reasonable to reevaluate the 3 percent guideline -- and important to judge its merits in the light of today's financial crisis. State economist Tom Stinson, who in years past has counseled that the state can do little to counter a recession, changed his tune after seeing the latest unemployment numbers. He said Minnesota would benefit from a $100 million to $200 million bonding bill, enacted quickly and aimed exclusively at fast-start, short-term, labor-intensive projects such as building repairs. Minnesota needs debt service policies that promote prudence, but in the current crisis it's worth considering whether the 30-year-old guideline is serving the state as well as it should.

-- Minneapolis Star Tribune