Midwest governors’ budgets include bonding proposals

Minnesota Gov. Tim Walz and North Dakota Gov. Kelly Armstrong have both proposed hundreds of millions in bonding as the Midwest’s governors begin rolling out state budget proposals.

Walz unveiled his $887 million bonding plan at the Rapidan Dam, which partly failed last summer, and which the Blue Earth County Board subsequently voted to remove. 

The governor’s bond plan would spend $144 million on water and transportation, including $10 million for Rapidan Dam work.

It also calls for $239 million on public safety projects, including a Minnesota State Patrol headquarters, $44 million for housing and the environment, and $395 million to maintain and renew state facilities, more than half of which would be directed to the Minnesota State University and University of Minnesota.

His proposed 2026-27 budget would spend $65.9 billion.

Hanging over Minnesota’s budget debate is a budget forecast in November that anticipated a $616 million surplus for 2026-27 but a $5.1 billion deficit for 2028-29. 

There’s also the open partisan warfare breaking out between Republicans and Democratic-Farmer-Labor Party members in the legislature, where the House is poised for an even 67-67 split, pending the results of a special election in which the DFL candidate is favored to win. The Senate is temporarily tied, as well. Walz is a DFL member.

Minnesota is rated triple-A across the board and has $7 billion of general obligation bonds currently outstanding and $1.6 billion of other tax-supported debt, according to Minnesota Management and Budget.

In North Dakota, Gov. Kelly Armstrong released his $19.89 billion executive budget proposal Jan. 15. It includes a $464 million bonding package composed of $300 million for a new state hospital in Jamestown; $120 million for airport projects in Fargo, Grand Forks and Dickinson; and $44.2 million for a military museum at the North Dakota Heritage Center.

The newly elected Armstrong said the state will repay the bonds by taking more money out of the state’s Legacy Fund, an investment fund seeded by a share of tax collections on oil and gas extraction.

“Bonding is appropriate to move significant infrastructure projects forward now and avoid incurring additional construction inflation resulting from delay of the projects,” Communications Director Mike Nowatzki said. “Construction inflation costs will offset or exceed the rate of interest related to bonded indebtedness.” 

The governor’s office decided to bond rather than use reserves, as suggested by some legislators, because “there are other uses for accumulated balances, such as for projects and initiatives that provide an immediate return and benefit to the citizens of North Dakota but are not a project suitable for bonding,” such as transfers to the defined benefit pension plan to bolster the state’s financial position and reduce the unfunded liability, he said. 

North Dakota is rated AA-plus by S&P Global Ratings, with its appropriation debt rated AA and its moral obligation-backed debt rated AA-minus, and Aa1 by Moody’s Ratings, which rates bonds backed by the Legacy Fund Aa2. The outlooks from both rating agencies are stable. 

Indiana Gov. Mike Braun’s first $44 billion biennial budget proposal calls for the elimination of tax on tips and tax on retirement income, eliminating the income cap to receive vouchers to subsidize attendance at private schools and fully funding the Medicaid forecast, which projects growth from $4.116 billion in 2024 to $5.182 billion by 2027. 

According to the budget director’s presentation to the State Budget Committee on Jan. 16, Indiana is seeing unprecedented growth in Medicaid obligations even as economic growth cools.

Spending on long-term services and support is a “significant driver” of that growth, Budget Director Chad Ranney told The Bond Buyer.

Ranney said that while the budget itself includes no new bond proposals, separate legislation is paving the way for potential bonding later this year. 

The costs of universal school choice are currently a matter of dispute between the State Budget Agency and the Legislative Services Agency, Ranney said, but LSA has published a fiscal note saying the move will raise state expenditures by an estimated $88.6 million in FY2026 and $94.6 million in FY2027. 

Indiana funds its school voucher program through the same tuition support appropriation used for public school funding. The executive budget increases tuition support by 2% year-over-year, “which is more than enough to cover the cost of universal choice and provide increased funding for public schools,” Ranney said.

Indiana is rated triple-A with a stable outlook by Fitch Ratings, by Moody’s and by S&P, which rates the state’s appropriation debt AA-plus and its moral obligation debt AA.

In Iowa, Gov. Kim Reynolds would tap general fund balances and reserves to make her $9.4 billion 2026 state budget proposal pencil out on $8.7 billion in revenue projected to be available from the general fund, according to the state’s Revenue Estimating Conference.

Moody’s and Fitch affirmed their triple-A issuer ratings of Iowa in March.

Iowa’s income tax rates, which topped out as high as 8.53% for the top bracket in 2022, have been replaced by a flat 3.9% rate in 2025, reducing state revenue.

The corporate tax rate, now at 7.1%, will gradually decrease to 5.5% in coming years.

The state’s school voucher program will expand to cover all private school students next year, and Reynolds is proposing a 2% increase in per-student funding across the board, according to Iowa Public Radio.

In her January Condition of the State speech, Reynolds said she wants to repurpose Iowa’s private activity bond allocation toward energy and water infrastructure projects, in order to support private investment in rural areas.

The plan will be moot if Reynolds’ fellow Republicans in Congress eliminate private activity bonds, or the entire municipal bond tax exemption.

Iowa is not the only Midwest state looking at tax cuts even as pandemic relief funding disappears and a new administration takes office in Washington, D.C.

Nebraska’s governor has been pushing property tax relief, and Indiana legislators may take up property tax reform this session, as well. 

“I think you’re going to see a lot of activity on property tax in particular,” said Stephen Slivinski, senior fellow at the Cato Institute, a libertarian think tank based in Washington. “The best tax proposals are more like reforms and not just one-time rebates or rate cuts.”

Wesley Tharpe, senior advisor for state tax policy at the Center on Budget and Policy Priorities, a nonprofit center-left think tank, said recent years have brought a “historic” wave of tax cuts at the state level, with more than half of states cutting personal or corporate income taxes since 2021.

“Many states have drained resources even further with a surge of private school voucher programs and, in many states, cuts or caps to the property tax,” Tharpe said. “Now the combined effects of those choices are increasingly showing up on state balance sheets, with slow revenue growth and budget shortfalls increasingly common. All this right at the time pandemic-era federal aid is expiring and the threat of new federal budget cuts is rapidly accelerating.” 

Cato’s Slivinski noted that the federal government has been filling in states’ budget gaps during the pandemic era. 

“This fiscal year is the first year that most states, if not all states, will have to deal with fiscal issues they haven’t had to worry about for several years,” Slivinski said. “Now we’re seeing for the first time since COVID a decline that wasn’t precipitated by a pandemic. States are grappling with the idea that they have to get their budget back into balance.” 

While the Trump administration may seem less likely to funnel aid to states, “I don’t actually see the number changing very much,” Slivinski said. “You typically hear a lot of saber-rattling… but despite the rhetoric — and you’ve had this rhetoric going back to the ’90s or even the ’80s — you still don’t see a whole lot of movement down.”

There might now be strings attached in terms of what states can spend federal funding on, he noted — “and those will basically be politically motivated criteria” — but at the end of the day, he said, congresspeople from both parties want to send money back to their home states.

The Trump administration this week ordered federal agencies to pause disbursement of almost all grants and loans.

“Moving forward, states should respond prudently to the current environment by resisting further tax cuts, pausing or reversing recent ones, and raising new revenues to guard against uncertainty and invest strategically in areas that yield long-term benefits,” CBPP’s Tharpe said.

South Dakota Gov. Kristi Noem, before stepping down to become Secretary of Homeland Security, released a 2026 budget that includes no new bonding but signals that the governor is aiming to retire multiple series of bonds in the year ahead.

In a press release, the governor’s office said the $53.7 million invested in paying down bonds would yield $16.24 million in savings and free up $5.043 million in general funds.

South Dakota is rated AAA with a stable outlook by Fitch, by Moody’s and by S&P.