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In 1982, Penny won the DFL nomination for the 1st District and upset four-term 2nd District Republican Tom Hagedorn, becoming only the third Democrat to ever represent this district. Leading up to the election, Republicans were divided after the conservative Hagedorn narrowly defeated two-term First District moderate incumbent, Rep. Arlen Erdahl, in a contentious Republican Convention endorsement contest after redistricting; in addition, Democrats made large gains in congressional elections across the country, which contributed to Penny's victory. Penny was reelected in 1984 with 56 percent of the vote, becoming the first non-Republican to win reelection in the district since statehood. He never faced another contest nearly that close, winning four more times by an average of 70 percent of the vote.
Penny was a somewhat conservative Democrat; he opposed gun control and abortion (though he has since become pro-choice). These stances were typical for a mostly rural district in southern Minnesota. He was best known, however, for his work on fiscal policy. Although he had built a nearly unbreakable hold on his district, he announced in 1994 that he would not run for a seventh term. After Jesse Ventura was elected governor in 1998, Penny served an informal advisory role to the governor and assisted with the gubernatorial transition team.
In 2008, he endorsed Republican John McCain for president and Independence Party candidate former senator Dean Barkley for US Senate. Penny is president of the Southern Minnesota Initiative Foundation. He is also a senior fellow at the University of Minnesota's Humphrey Institute. He served for a time as the institute's co-director alongside one of his former congressional colleagues, Republican Vin Weber.
He serves on the advisory board of the Institute for Law and Politics at the University of Minnesota Law School and is on the board of directors for the Energy Literacy Advocates. Penny also serves as vice chairman of the board of directors of ACDI/VOCA, a nonprofit U.S. international development organization. In addition, he is a co-chair of the Committee for a Responsible Federal Budget.