Minnesota legislators and legislatures often refer to even numbered years as “bonding” and odd years as “budgeting.” However, there is no constitutional or other legal provision requiring “bonding” vs. “budgeting” years. The informal distinction simply means that in odd years, the legislature hopes to pass a two year budget. In odd years, with the budget taken care of, they have a shorter session in which they address bonding—incurring long term debt to address long term investments.
The distinction is informal and not mandatory. The State of Minnesota has passed bonding measures in “budget” years. It has addressed the budget in “bonding” years. It has also gone through “bonding” years without issuing any bonds.
In simple terms, the purpose of bonding is to spread the costs of a project over a time period similar to the benefits of that project. Citizens are generally leery of government debt, but there are times when it may make sense. By way of analogy, a family may want to purchase a home, but be unable to pay for the home out of a single year’s income. For this family, it may make sense to spread the costs of that home out for many years. Paying for a home for 20 years can be a responsible choice, particularly when the family will also be enjoying the home for 20 years or more.
For states, there are more reasons that bonding can be a responsible choice. First, states are generally incapable of saving for projects in advance. A family may be able to accumulate the price of a home over several years before purchase, but states can’t (or at least don’t) effectively save up for large purchases in advance. Second, the makeup of a state changes over the years. If a bridge built in 2016 will last until 2036, then it might be unfair to make 2016 voters and taxpayers fund the entire cost.
The State of Minnesota’s debts are governed by Sections 5-7 of Article XI of the State Constitution. The Legislature has detailed additional requirements in Minnesota Statues, section 16A.631-.79. State debt may only be incurred for specific limited purposes. These are spelled out in detail in Section 5 but in short, the debt is for the acquisition and improvement of capital such as land, buildings, and infrastructure.
Bonds specifically are governed by Section 7. Bonds may not mature more than 20 years after issue. To authorize a specific bond the law must “distinctly specify the purposes” of the bond. Where a bond serves multiple purposes, each purpose must have specific amounts allocated to it. State bonds are maintained in a separate account from the general fund. The State is required to levy taxes sufficient to pay the Section 7 bond payments as they come due.
As for the bonds themselves, there are generally three types.
Bonds issued under Section 7 are General Obligation Bonds which are securities backed by the State, meaning that the State will do what is necessary to pay the obligations, including levying of new taxes. General Obligation Bonds can only be issued after a 60 percent vote of each legislative body. This heightened “supermajority” makes sense given that such a bond effectively commits payments for up to 20 years.
The State may also issue Revenue or Appropriation Bonds. Revenue Bonds are payable only out of a specific revenue stream. For instance, a stadium may be built in part with money from Revenue Bonds and the bonds themselves could be paid out of a tax on the stadium and surrounding properties. If the taxes pledged don’t cover the bond payments, then (absent some other action) the bonds go unpaid. Appropriation Bonds have no designated revenue stream or constitutional requirement to pay them. The State merely indicates that it intends to appropriate money to pay these as they come do in the future.
For more information on State Bonding in Minnesota see these resources:
This information is general in nature and should not be construed as tax or legal advice.