Why the 2026 legislature must avoid a massive bonding bill

Beginning February 17, Minnesota legislators will convene for the 2026 legislative session. Lawmakers will likely have to decide, among other things, whether and how much to spend on an infrastructure package, commonly known as a bonding bill due to the nature of its funding.

To get that process started, Governor Walz has proposed a $907 million infrastructure package, of which 94 percent is in state-issued bonds. As the Star Tribune reports, this is merely a fraction of the $6.8 billion that agencies and local governments have asked for. However, it is 21 percent higher than the $708 million package the legislature passed in the 2025 session.

State-issued bonds, particularly general obligation bonds — which constitute the majority of borrowing in Minnesota —  are “backed by the full faith, credit, and taxing powers of the state.” That is, the state cannot default on these loans and, if necessary, must raise taxes to pay them down. It is important, therefore, to discuss the implications of the upcoming bonding session in relation to the state’s overall fiscal outlook.

The good news: Minnesota adheres to sound borrowing principles. This is especially reflected in the state’s outstanding credit ratings. However, the state’s looming budget could spook investors, raising borrowing costs. But even without changes in interest rates, a large bonding bill automatically means higher spending on debt service, which, without addressing the state’s looming deficit, puts additional pressure on state revenues.

Why a larger bonding bill could be risky

Constitutionally, the legislature faces no constraints on the size of the bonding bill it can pass each year. However, the state follows several guidelines to keep debt levels at a manageable level. Under state guidelines adopted in 2009:

(1) total tax-supported principal outstanding shall be 3.25 percent or less of total state personal income;
(2) total principal, both issued and authorized but unissued, for state general
obligations, moral obligations,27 equipment capital leases, and real estate capital
leases must not exceed 6 percent of state personal income; and
(3) 40 percent of G.O. debt must be due within five years and 70 percent within ten
years, if consistent with the useful life of the financed assets and market conditions.

Per the November 2025 forecast, Minnesota Management and Budget (MMB) estimates that Minnesota could borrow up to $4.2 billion in the 2026 fiscal year and still meet guidelines 1 and 2, and up to $1.2 billion and meet guideline 3. Gov Walz’s proposal, therefore, is in line with the state’s debt capacity.

Risks remain, however, especially given uncertainty at the federal level.

Looming budget deficit

Investor confidence in Minnesota’s ability to pay back debt, as illustrated by the state’s triple-A bond rating, helps keep interest rates low. This could change, especially considering Minnesota’s concerning fiscal outlook.

As American Experiment has continued to document, while Minnesota is expecting a $2.5 billion surplus in the 2026-27 biennium, state spending has exceeded tax collections every year since 2024. In the 2028-29 biennium, spending will outpace revenue collections by over $2 billion each year.

This does not bode well for the ability of the state to maintain the budget and pay its debts. In the case that the state’s fiscal outlook continues to deteriorate, interest rates could rise to reflect a shift in investor confidence.

But even without rising interest rates, debt service costs will rise given extra borrowing.

Under the November 2025 forecast, MMB estimates that, assuming a $1.1 billion yearly bonding bill, the state could add an extra $802 milliion in debt service costs between 2027 and 2032. A smaller bonding bill would likely mean lower projected costs. Governor Walz’s bonding proposal, for instance, adds $152 million to the general fund between 2026 and 2029. This is $133 million lower than MMB’s estimate for the same period.

Large or small, any bonding bill passed will have significant implications for the state budget. Legislators must evaluate any potential borrowing costs with the current budget deficit in mind.

Federal policy changes and uncertainty

The One Big Beautiful Bill (OBBBA) has provisions that, if enacted, would significantly affect state budgets. Estimates are not yet available for some of these changes. The November 2025 forecast, for instance, does not include budgetary estimates for Medicaid work requirements as well as semi-annual eligibility determinations.

This is because, as MMB explains,

There is no state law authorizing or directing the process of implementing work nor redetermination requirements for this program.

Other provisions, such as cost-sharing, are also not included in the forecast, for similar reasons.

To effectively adopt anti-fraud and waste measures as well as community engagement reporting requirements, Minnesota will likely need to invest in updating the state’s data systems, which would require increased funding for counties. At the same time, costs could rise even for provisions already budgeted for.

A large bonding bill in 2026 would diminish the state’s capacity to sustainably respond to OBBBA changes and handle other unforeseen circumstances, such as an economic downturn.

The need for a broader discussion

By law, general obligation bonds require a three-fifths majority to pass. This, and the divided makeup of the legislature, means the final size of the bonding bill is up for debate. This is advantageous for discussion.

The state of Minnesota borrows for various services, some of which are arguably non-essential to the state’s functioning. In the 2020 session, for instance, the legislature appropriated over $100 million, authorizing the Minnesota Housing Finance Agency to issue housing infrastructure bonds. Governor Tim Walz is asking for $50 million for housing. Housing subsidies, however, fail to address the underlying regulatory hurdles and fees that stiffle housing development, ultimately shifting costs onto taxpayers.

Given Minnesota’s worsening fiscal outlook, lawmakers need to reassess routine borrowing for housing and other non-core services. They should not treat any expenditure, nor the size of the bonding bill, as a foregone conclusion.