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AG finds $6B error in Destination Medical Center subsidy

The formula that determines how much state money Rochester’s Destination Medical Center project receives inadvertently requires about $6 billion more in private investments for the project to get the full state match, according to an opinion the Minnesota Attorney General’s office published late Tuesday.

State Rep. Kim Norton, one of the sponsors for the DMC legislation, said Wednesday she is “deeply disappointed” by the solicitor general’s opinion. But the DFL legislator from Rochester added that she doesn’t think it’ll be a big deal to change the formula in the 2015 session to what was intended because the original bill passed with broad bipartisan support.

“It’s just a minor clarification really,” she said. “I just believe that they are reading the words in a way that is not what we intended.”

As it stands now, though, the project has to raise much more private money than expected to qualify for state money the project receives. The AG’s interpretation would require about $12 billion in private investment before the project could receive the full $327 million state match. That’s twice the $6 billion in private investment from Mayo and others that promoters had advertised.

The problem arises from a formula that determines when state money will be released to the project.

The project provides $585 million total in state, county and city money to remake Rochester with improvements to transportation, public spaces and other amenities. To ensure that public funds are matched by private investments from Mayo Clinic and others, the state money will only be released as private investments are made in the DMC district – and only after the first $200 million in private money is raised.

The legislative formula gives the DMC project state money equal to 2.75 percent of the qualified private investments, up to $30 million each year. But DMC officials disagree with the Minnesota Department of Employment and Economic Development about how those private investments should be tallied.

DMC and Mayo officials say it should be a “cumulative calculation” that applies the 2.75 percent multiplier to private investments from the previous year and all prior years. The chief authors of the DMC legislation said this was the intent all along.

However, DEED – backed by the Attorney General’s office and Minnesota Management and Budget – says the law requires it to be an annual calculation that applies the multiplier only to private investments from the previous year.

On late Tuesday, the AG issued an opinion from Solicitor General Alan I. Gilbert affirming DEED’s interpretation. He noted that the statute states: “For subsequent years [after the first year], ‘qualified expenditures’ means the expenditures for the preceding year.”

Although legislators involved say that’s not what they intended to do, state law and court cases don’t allow after-the-fact testimony from the lawmakers who crafted the bills to dictate legislative intent. Instead, legislative intent is determined through so-called “contemporaneous history” during the session, such as the official bill summary’s explanation that the multiplier will be applied to “expenditures in the prior calendar year.”

The annual calculation would require about $12 billion in private investment before the project could receive the full $327 million state match, according to an Aug. 26 memorandum from DEED Commissioner Katie Clark Sieben to Gov. Mark Dayton.

On the other end of the spectrum, a cumulative calculation over 20 years could give the project the full state match with a private investment of as little as $800 million – far less than promised.

“The City of Rochester/Mayo interpretation presents significant risk to the state’s investment,” Clark Sieben said in the memo.

She conceded that neither the $12 billion amount nor the $800 million figure were the totals discussed when sketching out the DMC plan. So she has suggested that legislators in the 2015 session change the 2.75 percent multiplier to 5.45 percent to hit the $6 billion private investment target that had been the intention all along.

Prior to the release of the opinion, Clark Sieben said she intended to distribute the state’s share of the project on a cumulative basis, as DMC and Mayo wanted – although she also asked for the formal attorney general opinion. DEED officials weren’t immediately available to comment on how the opinion will change DEED’s approach.

In her August memo, Clark Sieben said that resolving the issue in the 2015 session shouldn’t hurt the project because there has only been about $7 million in qualified private investments so far and the project isn’t eligible for any state money until it has $200 million in private investments.

DMC officials weren’t immediately available for comment. Destination Medical Center Corp. Board Chair Tina Flint Smith said at a Sept. 11 board meeting that she didn’t foresee any problems since DEED had agreed to a cumulative calculation, but it’s not clear how the situation changes with the solicitor general’s opinion.

At the same board meeting, members approved $250,000 in contingency funds for legal services in case the attorney general’s opinion went against them.

The solicitor general’s letter is available here.

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