Minnesota put on credit watch over budget fracas

Updated at 5:45 with comments from Gazelka, Frans

One of the Wall Street firms that confers debt ratings on states and other public borrowers has put Minnesota on a credit watch over concerns that a dispute between the Legislature and Gov. Mark Dayton could impact debt payments.

S&P Global Ratings, which rates Minnesota’s creditworthiness a notch below perfect, issued a statement Thursday that it is monitoring the state’s situation and could lower the rating if a stalemate isn’t resolved within the next few months. A downgrade would make it more expensive for the state to borrow for public construction projects because ratings affect interests rates.

“The CreditWatch placement reflects our view of the governor’s use of his line-item veto authority, during approval of Minnesota’s $46 billion 2018-2019 biennial budget, to reject appropriations to the Legislature that defunded the Legislature’s budgets,” said S&P Global Ratings credit analyst Eden Perry.

Lack of funding could make it impossible for the Senate to deliver monthly lease payments needed for the twice-yearly installments on debt from the new Senate office building. It’s unclear what power the Department of Administration, which holds the lease, has to make other funding arrangements.

The firm blamed both the DFL governor and the Republican-led Legislature for having “politicized the agreement over the lease appropriation” and said it “reflects unfavorably on the state’s willingness to fund all of its debt service payments despite its ability to pay remaining very strong.” The next $1.9 million interest payment is due on the “certificates of participation” in December.

Senate Majority Leader Paul Gazelka, R-Nisswa, said the standoff is having real consequences.

“The governor should call an immediate special session to fund the legislature,” Gazelka said in a written statement. “If he refuses, I’m hopeful the courts will step in soon to declare the governor’s action unconstitutional so the state can continue to pay its obligations and avoid potential negative consequences to our credit rating.”

Department of Minnesota Management and Budget Commissioner Myron Frans said efforts to resolve the issue are ongoing with a goal to “maintain the sound fiscal management that has defined his administration.”

“It is indeed unfortunate that Senate Majority Leader Gazelka put the state’s fiscal condition at risk when he stated that the Senate would not prioritize its building rental payments from its remaining funds,” Frans said.

The S&P statement said the negative outlook would be removed if a deal is struck within the next 90 days. Barring one, the statement warns that Minnesota could see its overall credit rating dropped by several notches.

Lawmakers have sued Dayton over the line-item veto, which they said violated constitutional separation of powers. Dayton maintains he was justified in his veto and has encouraged negotiations resume over a possible special session. He is seeking to revisit tax and policy changes he didn’t like in the budget bills he signed.