CHICAGO - Minnesota Gov. Arne Carlson has signed into law a $16.5 billion fiscal 1994-95 biennial general funds budget and a sweeping campaign finance reform measure.

Passage of the budget last week will enable the state to achieve by Nov. 30 a $400 million rainy-day fund balance. which will reduce the need for interfund borrowing in the next biennium, Carlson said in a press release. The state will end fiscal 1993 on June 30 with $360 million in the rainy-day fund.

The campaign finance reform law places tighter limits on the amount of money state and local officials can collect from individuals and political action committees.

Under the budget agreement, the governor can reduce spending across the board by up to $160 million to maintain the rainy-day fund at $400 million if the state's November revenue forecast indicates the reductions are needed, according to Laura King, the state's budget director.

The cuts would need the approval of the bipartisan Legislative Commission on Planning and Fiscal Policy, King said. Funds for debt service and two Department of Health and Human Services programs, which depend on federal matching funds, would be exempt from any cuts, King said.

"This is a very important budget management tool," Carlson said. "It allows us to act quickly when the national economy dips below expectations. We will use it to maintain our strong credit rating by making cuts that are necessary to avoid borrowing."

Extension of the authority to cut spending to keep the rainy-day fund at $400 million in subsequent bienniums would need legislative approval, state officials said.

In January, Carlson proposed a $16 billion 1994-95 budget that would allow the state to end the biennium with a $240 million rainy-day fund. In March, after an improved revenue forecast, Carlson proposed increasing the fund to $500 million.

King said that a $500 million rainy-day fund would have enabled the state to eliminate the need for short-term borrowing between state funds in the next biennium. However, under the $400 million compromise plan, she said the state may have to use interfund borrowing once during the biennium to meet its cash-flow needs.

Dan Aschenbach, a vice president of the central regional group at Moody's Investors Service, said that increasing the rainy-day fund to $400 million is "certainly a positive step" and "clear evidence" of the state's sound financial policies.

Claire Cohen, executive vice president in the governmental finance department at Fitch Investors Service, said, "I certainly think it's positive to increase the reserve. I think that it's prudent." Cohen said the contingency plan for across-the-board cuts would help the state maintain the rainy-day fund in the event of economic downturns.

The state's general obligation debt is rated AA-plus with a stable outlook by Standard & Poor's Corp., Aa by Moody's Investors Service, and Aa-plus by Fitch.

The budget was approved last Thursday in a special session, which became necessary when House Democratic-Farmer-Labor members failed to go along with a compromise struck between Carlson, a Republican, and the Democratic-controlled Senate.

House Democrats refused to approve the compromise because the governor's proposal to maintain the rainy-day fund did not include legislative approval of the spending cuts, according to Mike Berthelden, House fiscal analyst.

Overall, the budget increases spending by about 10% and includes the issuance of $119 million of general obligation bonds in the next biennium for various capital projects, including the conversion of a treatment center into a prison facility, King said. The all-funds budget is $25 billion.

While Carlson was able to win the Democrats' approval for the increase in the state's rainy-day fund, he reportedly received some backlash from party members over the campaign finance reform law.

Democrats were said to have criticized the governor for soliciting contributions from corporations prior to implementation of the new limits last month. A spokesman for Carlson said that no laws were broken by volunteers for the governor who contacted corporations for contributions before the May 21 deadline.

Officials from several Minnesota-based bond firms contacted by The Bond Buyer this week said they did not receive any calls from the governor's office.

The reforms were passed partly because of public outcry over local news reports that detailed campaign contributions to state office holders, according to state officials.

The new limits apply to contributions from individuals and political action committees. Corporations are still prohibited from giving contributions as was required under the previous law.

Under the new law, campaign contributions to the governor and lieutenant governor and to potential candidates for those offices were decreased to $2,000 from $20,000 in an election year and to $500 from $3,000 in a non-election year.

Contributions for a senator or state representative were limited to $500 in an election year and $100 in non-election years.

Previously, state senators were limited to campaign contributions of $1,500 in an election year and $500 in a non-election year. State representatives were previously limited to $750 in an election year and $250 in a non-election year.

The new law also subjects local officials to new restrictions. For local officials in counties or cities with a population of more than 100,000, contributions are limited to $500 in an election year and $100 in a non-election year. Officials in counties or cities with a population of under 100,000 are limited to $300 in an election year and $100 in a non-election year.

In the past, local governments set their own limits on campaign contributions. For instance, a Minneapolis city ordinance restricted individual contributions to $3,000 for mayor during a two-year period, $1,500 for comptroller-treasurer, and $600 for all other elective offices.

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