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Third agency lowers Minnesota credit score

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ST. PAUL -- The country's third major credit-rating agency has downgraded Minnesota's bond rating, meaning that borrowing money for new construction and repair projects likely will cost state and local governments more.

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Minnesota Management and Budget on Friday announced Standard and Poor's dropped the Minnesota rating from AAA to AA-plus.

"This downgrade is a direct result of the recently passed state budget," Management and Budget Commissioner Jim Schowalter said. "The budget was substantially balanced using one-time measures and does not lead to a long-term financial solution. The rating agency also cited diminished reserves, further payment delays and the reliance on tobacco bonds for their decision."

Moodys and Fitch rating agencies already this year dropped Minnesota's ranking. Other states facing financial problems also have experienced downgrades, as has the federal government and many other countries.

The ratings are used when the state sells bonds to finance public works projects ranging from building new facilities to fixing existing state structures to buying land for parks. With a lower rating, state and local governments may pay higher interest to borrow the money.

The state is due to sell bonds next week.

Management and Budget says Minnesota needed 15 years to regain the highest rating the last time the state was downgraded.

"Their assessment confirms what we all know -- that we need to fix the state's budget problems so that we don't have large and recurring budget deficits," Schowalter said. "We also need to restore our reserves and pay back shifts. It will take time and commitment to get our ratings back."

Robin Prunty of S&P said "nonrecurring" funds contribute to a long-term budget imbalance. The company said that delaying state payments to schools, done in the last two budgets, is part of the reason for the downgrade. Another reason is borrowing money by using tobacco lawsuit payments as collateral.

At the same time, Standard and Poor's said it will need to watch how federal funds come to Minnesota.

"We do not see a potential for raising the rating in the near term given the state's diminished financial flexibility," S&P reported. "Downside risk for the rating includes the potential for significant reductions in federal funding that flows to the state."

Democratic Gov. Mark Dayton blamed Republicans for the problem.

"The downgrading of Minnesota's credit rating is very disappointing but not surprising, given the fiscal irresponsibility of the Legislature's Republican majority," Dayton said. "Standard and Poor's specifically cited the use of one-time measures, which would not have been necessary had my proposed budget been adopted."

Dayton wanted to raise taxes on the rich to balance the budget, but Republicans would not go along.

House Speaker Kurt Zellers, R-Maple Grove, objected to Dayton blaming Republicans, saying both sides should share the responsibility.

"In order for us to pass that budget into law, he had to sign it," Zellers said.

Following an extended budget fight this year, which ended after a 20-day July government shutdown, Dayton and Republicans said they did not like the budget but both sides needed to accept provisions they did not like.

"None of us were thrilled with the deal ... but just because you don't like the bill doesn't absolve you from it," Zellers said.

The idea for tobacco lawsuit borrowing came from previous Gov. Tim Pawlenty and Schowalter, then a deputy commissioner, Zellers said.

State financial news would have been worse had Dayton won and raised income taxes, the speaker added.

Zellers said Republicans have no plans to rework the two-year budget next year, but will consider several reforms that could save the state in the long run.

The downgrade news "is unfortunate and it is, unfortunately, not surprising given where the country is," Zellers said.

Don Davis reports for Forum Communications Co.

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Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.
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