The Minnesota House approved a budget bill that would designate $20 million for nonprofits that save the state money.
Republican legislators seeking steep reductions in government spending want to borrow money to usher in some of their proposals.
The GOP-controlled Minnesota House approved a budget bill Wednesday that cuts one-third of state government, in part through a 15 percent workforce reduction, consolidation of departments and savings from outsourcing several state duties. Tucked in the $601 million bill is a tiny pilot program that would allow the state to borrow $20 million to pay nonprofit agencies that save the state money or create new tax revenue.
State Rep. Keith Downey, R-Edina, said the program could usher in a transformative change that allows taxpayers and private investors to capture the riches from government reform.
"These measures will make our state more competitive and national leaders in reform again," Downey said before the House passed the package 72 to 61.
Critics doubted private investors would find the bonds appealing and said the state should just set aside funds if the program is that important, even with a $5 billion budget hole. DFLers said the proposal highlights that the GOP can't balance the budget with the dollars available, as they pledged on the campaign trail.
DFLers compared the idea to an unsuccessful proposal by former Gov. Tim Pawlenty to float nearly $1 billion in bonds to balance the budget a few years ago.
"We are deficit-financing for programs" the state should pay for, said Rep. Lyndon Carlson, DFL-Crystal. "Clearly, this is a chance to skirt the constitutional requirement to balance the budget."
Under the plan, the state would sell $20 million in bonds to private investors. The pilot program would use the money to pay nonprofit agencies that have programs that employ people or reduce the need for state services.
For instance, if a program helped an unemployed Minnesotan land a job, the agency and taxpayers would benefit from the new tax revenue. If a separate organization helps an alcoholic sober up and require fewer state services, taxpayers would save money and allow investors to be repaid.
Directors of area nonprofit agencies actually proposed the idea, Downey said. Nonprofit directors face declining donations as state government wrestles rapid-fire deficits that require new, affordable ways of providing services. At the same time, investors could, theoretically, profit from the success of those partnerships.
"This is a pilot, only a test, to see if it might work," said House State Government Finance Committee Chairman Morrie Lanning, R-Moorhead.
It's unclear how appealing the bonds would be to investors. Most government bonds are backed by taxpayers, which make them a nearly risk-free venture. The pilot program bonds would not be state-backed, which means investors could be out of luck if the debt can't be repaid.
State budget officials estimated the interest rate would be higher than traditional government-backed debt. The state would repay investors over 20 years, racking up about $16 million in interest.
Moody's Investors Service, a top bond-rating agency that closely watches Minnesota's finances, would not comment on the proposal until it became law.
State Rep. Alice Hausman, DFL-St. Paul, said she doesn't believe investors would be interested.
Wells Fargo analysts think investors would have interest and gave the proposed bonds a better rating than state budget officials did, Downey said.
Dayton's administration is still looking at the proposal and has not weighed in. Some Republican senators are leery of the idea, saying the cash-strapped state should not consider borrowing money, for any reason.
Baird Helgeson • 651-222-1288