MinnEcon note: We’re keeping close tabs on Standard & Poor’s downgrade of U.S. debt and what it could mean for Minnesota. Bloomberg News is reporting that S&P is likely to cut its ratings on municipal debt secured by the federal government.
MPR News reporters Jennifer Vogel and Tim Nelson have been talking to local officials around Minnesota today. Here’s what they found.
City officials around Minnesota today said they weren’t expecting a direct impact from the downgrading of U.S. treasury bonds by Standard & Poor’s. But some are cautious and frustrated as they watch global markets absorb the development. At least that’s the sense I got from the city officials I spoke with this morning.
“I don’t feel there is any real direct affect to the city of Austin,” said City Administrator Jim Hurm. “We don’t get a lot of federal money. On the other hand, we get a lot of state money. If the state of Minnesota were to significantly reduce or eliminate local government aid, which is half of our revenue, I’m sure our bond rating would be reduced. But I don’t see an immediate effect on the city of Austin.”
Hurm is referring to a potential domino effect. If the downgrade results in increased interest rates, that could negatively impact the larger economy and make it more expensive for the state and cities to borrow. Higher interest rate payments would come out of local budgets.
“Short term, no, I don’t think we’re going to see an impact,” said Grand Rapids City Administrator Shawn Gillen, who notes that his city just had its A1 bond rating reaffirmed by Moody’s. The long term, he says, could be a different story, especially if the downgrade hurts the national economy and results in less intergovernmental revenue.
“There are a lot of people speculating about what’s going to happen, but the reality is nobody knows,” says Gillen. “This has never happened before. I’m just keeping my eye on it and making sure we’re prepared for any contingency… We need to be prepared for that contingency if we lost more LGA due to another downturn in the economy. But again nobody really knows what’s going to happen.”
School officials are among the people watching closely for effects of the U.S. credit downgrade. They borrow for many reasons, even more so since a state budget solution delayed more payments than ever to schools.
Jeff Solomon is finance and operations director for the Rosemount- Apple Valley-Eagan school district.
“I don’t think there will be a direct immediate impact on us. At the same time, there’s issues going on at the state level, where there’s real risk that the state may in fact have a downgrade. It hasn’t occurred yet, but there are still discussions about that But if there is a downgrade at the state level, I think that could impact the districts much more directly.
He said borrowing prompted by the school aid shift will likely not involve bonds in Minnesota, but that schools will be looking to banks for their short-term cash flow needs.
Duluth Mayor Don Ness says his city is in a good position should the cost of borrowing rise, since it just completed a schools project and a police station and aren’t anticipating any large projects in the near future.
The larger consequences of the downgrade for cities, he says, “will be determined by how the larger financial institutions in our country view this downgrade.” He thinks the move by S & P may have shaken how investors view the American economy.
“What we’ve done here is introduced the idea that it may not be the safest place to put your money. That is a blow to our greatest competitive advantage in this country: There is this confidence that folks should be able to trust the American government to fulfill our obligations. We’ve put that at risk.”
Should interest rates go up, Ness says, “There is no question it would have a devastating impact on our economy and especially small business owners who are looking to expand and create jobs, and it’s going to be more difficult and more costly to borrow to fuel that expansion and that job growth.”
“The frustrating part is this is a blow to our economy that was induced by politics,” he adds.
“They continue to bring us to the brink, playing chicken with the lives of millions of Americans and playing political games in which the loyalty is to their political party rather than what’s best for our country. It’s very frustrating.”