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Latest Moody’s notice is another warning for Minnesota to get its fiscal house in order

This week’s notice from Moody’s Investors Service wasn’t good news for Minnesota, but it wasn’t surprising, either. And, for the moment at least, it doesn’t mean that the state will have to pay more to borrow money for bonding projects.

Essentially, Monday’s notification was a reminder — if anybody in Minnesota really needs it — that the state’s fiscal house is not in order.

The bad news had come last month when Fitch’s had lowered Minnesota’s credit rating from AAA to AA+.

Slightly higher lending rates
In basic terms, that drop means that Minnesota — and likely Minnesota school districts and communities — will have to pay a slightly higher rate (a fraction of a percentage point) more to issue bonds. Bonds issued by public bodies in Minnesota tend to be tied to the state rating.

So are these drops in state ratings — and negative reports — costly? Yes. Back breaking? No.

Jim Schowalter, director of Minnesota’s Management and Budget office, said it’s very difficult to put a precise figure on just how much the lower rating — and Monday’s notification — will cost the state.

He won’t be pinned down on the costs, he said, because the interest rates on bonds changes constantly.

“At any given moment, the interest rate changes,” he said. “It changes second by second, hour by hour. These ebbs and flows really mess with your ability to do comparisons [on costs].”

The big loss is in the area of prestige.

“We’ve lost some of our elite-ness,” Schowalter said. “We’re still better than many.”

Commissioner Jim Schowalter
Commissioner Jim Schowalter

There are eight to 10 states that have held onto that coveted AAA status. Minnesota’s AA1 Moody’s rating is the first step below AAA. It still places the state ahead of such states as Wisconsin (AA2) and Mississippi (AA2) and way ahead of California and Illinois (A1).

The state’s history with Moody’s goes like this: In 1981, Minnesota had a AAA rating, but it was downgraded in 1982 to Aa (Moody’s didn’t have nuanced, numerical differences at the time). In 1993, the state bounced back up to AAA but then fell again to Aa1 in 2003.

More bad news likely
There’s a strong chance, though, that more disturbing news is headed our way. It’s expected that Standard & Poor’s may follow Moody’s report and take away Minnesota’s only remaining AAA ratings.

“We will make every argument to maintain AAA with them [S&P],” said Schowalter. “But they [the bonding houses] do talk to each other.”

A ratings drop by S&P would be troubling because it would likely have the strongest impact on the rates schools pay to borrow. And, of course, given the funding delays caused by the budget funding shifts, many Minnesota schools have to borrow to stay afloat.

Again, the percentage change would be less than a point. But more cost is more cost.

There are, of course, other difficult aspects to this.

The current budget solution — borrowing and shifts — did nothing to solve the state’s basic financial structure.

Schowalter suspects that the bonding houses are not political. The bonding houses, which act as information services to buyers, probably don’t care whether a balanced budget is achieved through cuts, higher taxes or a combination of the two. But the budget-balancing option that the Minnesota Legislature and Gov. Mark Dayton chose is a loser in the bonding world.

“Minnesota has incorporated non-recurring measures to fix budget shortfalls since 2009, when the economic downturned reached the state,” Moody’s said in its report to investors. “Each subsequent fiscal year the state continued to increase the use of one-time measures for a quick fix, creating a structural budget imbalance in future years.”

The report wasn’t entirely negative. There was, for example, this paragraph:

“The state has a fundamentally strong economy; it is not dependent on any one sector which can lead to economic weakness beyond that experienced by the country as a whole. Employment is diverse, with a mix of manufacturing, services, and trade similar to the nation. Personal income per capita is typically above the U.S. average.”

But the fact is, the state’s fiscal house is not in order. Schowalter said there are hard realities to face.

“It’s hard to repay school shifts [that now amount to $2.5 billion],” he said. “It’s going to take awhile. It requires a financial discipline to pay back shifts. The problem is, the economy isn’t humming. It’s going to take a lot of good economic news [to make the repayments].”

That’s not to say repayment is impossible. Schowalter noted that the state used shifts in 2003 to balance the budget and repaid them in a few years.

Even if the state somehow figures out a way to create a functioning, stable financial operation, how long will it take to regain that old AAA status?

“We’re accustomed to being AAA,” he said. “But we lost it once and it took 15 years to get it back.”

On the other hand, the most recent notification from Moody’s was a slap on the wrist and not another ratings drop.

“It could have been worse,” said Schowalter.

Doug Grow writes about public affairs, state politics and other topics. He can be reached at dgrow [at] minnpost [dot] com.

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Comments (5)

  1. Submitted by Paul Udstrand on 08/04/2011 - 10:51 am.

    This is all music to Republican ears. They deliberately create these financial crises and they think that more expensive borrowing will mean less borrowing, less spending, less government. I hope people who voted these guys appreciate what they’ve done. They’ve brought the “Shock Doctrine” to Minnesota.

  2. Submitted by Marcia Brekke on 08/04/2011 - 02:39 pm.

    And of course, the Repubs will find a way to blame Dayton for all this, using that cudgel to elect a Repub governor in the next election.

    Heaven help Minnesota if that happens: Dayton is all that stands between even AA+ and a financial D-.

  3. Submitted by Alec Timmerman on 08/04/2011 - 06:03 pm.

    Don’t forget who chose the way we funded our budget. Dayton wanted some reasonable tax hikes. Republicans chose the plan that is going to be a tax hike on all Minnesotans. Republicans chose the funding mechanism that lost us our rating. We will see higher interests rates, once again to protect those who benefited from the recession.

  4. Submitted by Raj Maddali on 08/05/2011 - 07:14 am.

    Of course for the sofistikated crowd, it is all the Republicans fault. The leftist element of the DFL has no interest in any financial sanity.

    Take a look at MPLS schools. The Sup. actually had the gall to hand out almost $350,000 in raises. On top of that she even handed out retro active raises. The cruelest part of that is that some of the people took the raises and then quit.

    It highlights the level of callousness towards the taxpayers money. Of course you never hear any of this in all the “blame the Republican” discussion, because it is too inconvenient.

  5. Submitted by Tom Christensen on 08/05/2011 - 10:13 pm.

    Grover Norquist, Tea Party, Koch, Zeller please stand up and take a bow leading Minnesota off another Republican financial cliff. Grover Norquist, Tea Party, Boehner, McConnell, you can take a bow too for leading the US to another financial disaster. George W. Bush and Tim Pawlenty showed us the Repubican philosophy doesn’t work and the no so bright electorate turned around voted them in again. When will the public wake up? Grover Norquist wasn’t elected anywhere to do anything and he is close to running the Republican party with his stupid pledges. Kock and Zeller are Tea Partiers so that philosophy has proven to be wrong too. A balanced approach is the only answer. If the electorate can stay awake that long maybe you won’t have very good luck in the next election.

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