Three Wall Street firms preserved Minnesota’s high credit rating this week ahead of an upcoming $847 million bond sale, deciding against a downgrade amid the protracted dispute over the Legislature’s operating budget.
The fresh credit opinions from Moody’s Investor Service, Fitch Ratings and S&P Global Ratings matter because the bond ratings determine how much interest Minnesota pays when it takes on debt to finance public construction projects. S&P, which earlier in the year put Minnesota on credit watch because of the legislative funding standoff, said its concerns “have been alleviated in the near term.”
The ratings are: AAA from Fitch, Aa1 from Moody’s and AA+ from S&P.
Minnesota’s “strong and growing economy” that has led to “healthy revenue growth in recent years” drove Moody’s decision, according to its statement. Likewise, Fitch delivered one of its top ratings to the state, citing the state’s “solid and broad-based economy” and sound reserves to weather an economic slump. None of the services had material concern with the nearly $45.6 billion two-year budget enacted this summer.
But all of the firms made mention of the ongoing legal fight involving DFL Gov. Mark Dayton and the Republican-controlled Legislature. Dayton stripped future funding for the House and Senate through line item-vetoes in May, an action that led to a lawsuit. After a lower court win for the Legislature, the Supreme Court said the Dayton vetoes were lawful but ordered the parties into mediation before deciding whether to let the vetoes stand. The mediation began Thursday.
Fitch said there is “ample time” to work out the dispute before the possibility of default becomes real. Moody’s listed “political intractability” among factors that could lead to a future credit downgrade. S&P conveyed the least patience with what it termed “a political disruption generally uncharacteristic of the state.”
S&P’s analysts wrote that the “unwillingness of the governor and Legislature to enact a biennial budget that was agreed on by both parties through the regular budget process has introduced an element of political risk into Minnesota’s credit rating profile and we will be reviewing this in terms of how it affects management of the state’s budgetary management and financial performance.”
Dayton’s vetoes drew notice from Wall Street because they put at risk the lease payments for a new Senate office building, which in turn are used to pay down $80 million in construction bonds. A temporary funding deal approved by a district court in June ensured that the state would make a $1.9 million bond payment on Dec. 1.
But in a notice ahead of next week’s bond sale, the Department of Minnesota Management and Budget said it could offer “no assurance” of continued payments. After December, the next installment is due in June.
The ratings agencies, however, said that even if the mediation fails to produce an agreement, the Legislature will be back in session in February and could vote to restore its budget then.