State borrows $454 million to upgrade State Office Building

By: - October 26, 2023 9:00 am

A sketch of the renovated State Office Building by Robert A.M. Stern Architects. Screenshot from Minnesota Legislature.

Minnesota on Wednesday sold $454 million in debt to fund the glow-up of the building that houses the secretary of state and the offices of 134 members in the Minnesota House.

The money will cover pricey construction costs to repair and upgrade a decrepit, 90-year-old building — known as the State Office Building, or SOB — as well as the financial engineering the state is employing, which comes with relatively steep interest costs.

Minnesota will pay 4.39% in interest for renovation of the SOB, which also houses the Legislative Reference Library, hearing rooms and other key offices that facilitate the operations of the state Legislature. 

The state sold “certificates of participation” — a higher interest form of borrowing because investors don’t have a guarantee they’ll get all of their money back. Minnesota Management and Budget, the state’s budget agency, sold the certificates to a winning bidder with a 4.39% interest rate, and the state has 20 years to pay off the debt. 

MMB, however, told the Reformer it doesn’t know how much Minnesota taxpayers will ultimately owe in interest on the $454 million debt, as the state could refinance beginning in year 10. But the interest on the loan will amount to nearly $20 million in the first year alone.

MMB also wouldn’t immediately disclose which financial entity is providing the loan. 

The Department of Administration, the agency overseeing the project, estimates the total SOB renovation will cost $478 million. The entity that bought the debt Wednesday is liable to pay a premium of about $24 million, meaning the state saved some money by only shelling out $454 million in debt.

The unconventional borrowing and high interest are the result of a 2021 legislative maneuver that sought to sidestep the political challenge of spending big money on offices for politicians. 

Normally, the Legislature, with approval of a supermajority of lawmakers, could sell more conventional bonds that offer the lenders a guarantee. The Senate at the time was controlled by Republicans, who were unlikely to support an expensive renovation. Then-House Majority Leader Ryan Winkler, DFL-Golden Valley, slipped through a little-noted provision allowing the House to create a lease-purchase agreement account to pay for the renovation without Senate approval.

According to the law, renovation costs for the SOB only needed approval from “the affected building’s primary tenant.” The House is the SOB’s main tenant, so Democrats were able to get their desired funding without interference from the then-GOP-controlled Senate.

As a result of the law, the state has an open-ended ability — meaning basically unlimited funds — to pay the interest generated from the SOB renovation without approval from current lawmakers, though a future Legislature could always cut off the funding. Hence, the higher-risk and higher interest rates.

“Because there’s that little bit of risk in there, it translates into a slightly higher borrowing cost as a riskier debt instrument,” said Jennifer Hassemer, MMB assistant commissioner of debt management and internal controls. By contrast, “(with) general obligation bonds, the state is always going to make good on those payments.”

Advocates for renovating the building say the SOB needs major renovations to fix flooding and mold, poor ventilation and safety hazards that have injured numerous people, including one staffer who needed major surgery after their thigh was impaled by an 8-inch wood shard after they brushed up against a wooden railing in a hearing room.

Winkler argued last year that the SOB needs more space  — 166,000 additional square feet — to accommodate people with disabilities and the growing crowds of people who want to participate in public hearings.

To fund the SOB renovation and pay back the debt, the Department of Administration and MMB will enter into a lease agreement. The financial entity that bought the debt will loan the Department of Administration money to fund the renovation. The Department of Administration will pay MMB rent. MMB will then pay back the financial entity, including interest, over time. 

MMB will appropriate the amount of money needed to make  the rental payments with interest each fiscal year. 

For the 2024-2025 biennium, the state allocated nearly $45 million for the SOB’s “predesign” and $54 million for SOB rental payments, according to the budget. 

If the Department of Administration decides the State Office Building needs more renovations than it budgeted for in its $478 million plan, it will need to ask the Legislature for more money — which Republicans will likely oppose since they’ve already been highly critical of the project. Rep. Kurt Daudt, R-Crown, last year said the renovation would make the SOB the “Taj Mahal ” of office space.

House Republicans sent a letter to Gov. Tim Walz and MMB on Oct. 9 urging them to halt the project. Rep. Kristin Robbins, R-Maple Grove, said lawmakers are only in session five months of the year, and professional staffers work remotely most of the time, so while the building needs HVAC upgrades and better technology for remote hearings, that shouldn’t cost half a billion dollars.

“The entire new Senate Office Building cost $90 million in 2017 – we can’t possibly need to spend more than five times that amount to remodel,” Robbins said in a press release.

Large renovation projects on old buildings often cost more than originally planned. For example, the cost of renovating the Minnesota governor’s residence nearly doubled from $7.1 million to $12.8 million in recent months. 

Construction will begin on the SOB’s new addition in December, and lawmakers hope all renovations will be finished by the start of the Legislature’s 2027 session.

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Michelle Griffith
Michelle Griffith

Michelle Griffith covers Minnesota politics and policy for the Reformer, with a focus on marginalized communities. Most recently she was a reporter with The Forum of Fargo-Moorhead in North Dakota where she covered state and local government and Indigenous issues.