May 9, 2018

Representative Sarah Anderson, Chair

State Government Finance Committee
583 State Office Building
Saint Paul, MN 55155

Dear Chair Anderson:

I am writing in response to your May 6 letter regarding your position on using funds from the stadium
reserve to pay for the construction of three veterans homes. I want to assure you that Governor
Dayton supports the construction of veterans homes. However, there are significant problems with
your approach.

First, you do not provide sufficient funding to ensure the veterans homes will be constructed under
federal grant requirements. Your proposal falls far short of the needed state match. Second, the state
would be better served by funding these important projects through general obligation bonds, the
traditional avenue of paying for important state assets. This year presents a prime opportunity to
invest in veterans homes through the bonding bill. Third, you propose to deplete the stadium reserve
to a fiscally irresponsible level. These concerns are outlined separately and in more detail below.

1. House Proposal Provides Insufficient Funding for Three Veterans Homes

The appropriations in the House proposal are not sufficient to cover the state’s share of construction
costs for three new veterans homes. Total state cost for constructing three new facilities is
approximately $75 million. The House proposal provides only $26 million of the state share and relies
on local communities to provide an additional $49 million.

Cost of Building Veterans Homes

At the request of Governor Mark Dayton, the Minnesota Department of Veterans Affairs (MDVA)
conducted an analysis of the cost of building and operating a new state veterans home. MDVA
consulted with Minnesota Management and Budget (MMB) and the Minnesota Department of
Administration in estimating the cost. The analysis considered current construction costs, anticipated
construction timelines, the availability of donated land that is connected to utilities, inflation, and
MDVA’s recent experience with building skilled nursing care facilities. The analysis made the following
assumptions about the facility and construction:

• 98,000 square-feet
• $640 per square foot

400 Centennial Building • 658 Cedar Street • St. Paul, Minnesota 55155
Voice: (651) 201-8000 • Fax: (651) 296-8685 • TTY: 1-800-627-3529
An Equal Opportunity Employer
Page 2
May 9, 2018

• 72 beds
• 2023 construction start date
• Three-year construction timeline
• 4.97% annual inflation rate
• Clean, donated land that is connected to utilities
• Predesign will cost $3 million

Given the above assumptions, the total cost of constructing one veterans home is estimated to be:

Predesign: $3 million
Design, Construction and Equipment: $62.6 million
Total Construction Cost of One Veterans Home: $65.6 million

VA Grant Process

The U.S. Department of Veterans Affairs (VA) provides competitive grants to states to construct new
veterans homes or expand, remodel, or alter current homes. The grants provide up to 65% of total
project costs and require at least a 35% state match. States may apply for a veterans home grant in
advance of a project or for reimbursement for a completed project. If a state applies for a grant with a
full match, the fastest timeline a project could be completed is about 5 years, with many projects
taking much longer due to limited federal grant funding.

Demand for grant funds exceeds available federal funding, so the VA maintains a rolling priority list.
Projects are first prioritized based on whether state matching funds have been committed at the time
of application. Due to the volume of projects and limited funding, projects without state matching
funds are unlikely to receive grant funds for many years.

State’s Share of One Veterans Home (predesign costs included 1): $24.9 million
0F

Estimated State Share of Three Homes: $74.7 million

Minnesota House of Representatives Proposal

The Minnesota House Omnibus State Government Finance Supplemental Budget bill includes $26
million for three new veterans homes in Greater Minnesota:

Bemidji $10 million

Montevideo $6 million
Preston $10 million
Total: $26 million

1
VA funding is provided for construction costs only. The state must fund the predesign work.
Page 3
May 9, 2018

The House appropriations are not based on cost estimates provided by MDVA and the Department of
Administration, the agencies who have the experience building new veterans homes.

Language in the bill states that “appropriations are not available until the Commissioner of
Management and Budget, in consultation with the Commissioner of Veterans Affairs, determines that
amounts sufficient to complete the projects are committed from non-state sources.” With only $26
million appropriated from the state, it will be extremely difficult for local communities to provide the
remaining $49 million in matching funds. Because the federal VA will not prioritize projects that do not
provide at least a 35% state share, MDVA will only advance applications to the VA if a combination of
the state and local funding reaches 35% of the construction costs of a new home.

2. GO Bonds Are the Best Source of Funding for Veterans Homes

Historically, Minnesota does not use cash to invest in capital assets, such as veterans homes. Instead,
we use our general obligation bond capacity to fund large-scale construction projects. By bonding for
the resources needed to build the veterans homes, the state can provide sufficient funding for the 35%
state share in a responsible way and complete the construction of the homes in a reasonable timeline.

We have the capacity to bond for these projects. Our recent debt capacity forecast stated that we
have over $3.5 billion in bonding capacity within our debt guidelines. We can certainly afford this level
of bonding authorization.

Everyone agrees we should honor our veterans with quality housing and health care services that are
reflective of the sacrifices they have made on behalf of our state and country. This can only be
accomplished if the proposals are fully funded to the required state match in a comprehensive and
fiscally sound manner.

3. Raiding of the U.S. Bank Stadium Reserve Fund Is Not Fiscally Responsible
The intended purpose of the stadium reserve is to ensure the state has sufficient funds to cover its
stadium-related obligations and to give the state flexibility to manage unforeseen swings in receipts or
obligations. Based on these expenses, the reserve should have a minimum of $42 million in the fund.
The funds currently in the reserve should not be used for non-stadium purposes at this time,
particularly before projected balances are realized.

Currently, there is only $25.8 million in the reserve. This is not a sufficient amount to weather an
economic downturn and still be sufficient to protect the general fund from stadium-related obligations.

MMB calculates the stadium reserve balance at the end of each fiscal year. While MMB projects that
the reserve will grow in the coming years – to $39.6 million in FY 2018, $57.6 million in FY 2019, $79.1
million in FY 2020, and $120.2 million in FY 2021 (which includes $18 million of projected sales tax
receipts from Minneapolis) – those future estimates are not yet in the reserve and it is possible that
the revenues will not be realized at these levels.
Page 4
May 9, 2018

At this time, MMB does not recommend placing a bet on a significantly reduced stadium reserve
balance being sufficient in an economic downturn. Furthermore, the state should consider allowing the
fund to grow. Growing the reserve is a strategy to prepare for 2023, which is the first year that the
stadium bonds can be refinanced. The state could potentially save significant future interest costs by
using reserve funds on hand in 2023 to pay down the bonds.

Thank you for the opportunity to outline the Governor’s concerns with the House proposals. Please do
not hesitate to let me know if I can provide additional information.

Sincerely,

Myron Frans
Commissioner

cc: Representative Leon Lillie

Representative Liz Olson