S&P Global Ratings has placed its 'AA+' rating on the State of Minnesota's general obligation debt on CreditWatch with negative implications. The CreditWatch placement also applies to S&P’s ratings on the state's standing appropriation debt, moral obligation backed debt, and school program guaranteed debt.
"The CreditWatch placement reflects S&P’s 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.
This has caused a nonappropriation on the state's $80.1 million certificates of participation series 2014 (Legislative Office Facility Project) and there is a lack of clarity about how the rental payments and debt service will be paid. In S&P’s view, the governor and legislative leaders have politicized the appropriation in their dispute over the budget. In that sense, the lack of agreement over the lease appropriation reflects unfavorably on the state's willingness to fund all of its debt service payments despite its ability to pay remaining very strong.
This has not triggered an extraordinary mandatory redemption of the lease because S&P understands there is no automatic termination or acceleration of the lease and that termination is at the option of the Department of Administration (the lessee under the lease purchase agreement and the sublessor under the sublease); however, it is unclear if the governor and the Legislature will reach an agreement in the near term such that either the Senate will cover the lease rental payments or the Department of Administration will appropriate for the lease, which is also allowed under the terms of the documents according to the state.
Currently, there is time for the state to resolve this matter because the lease rental payment is due on Nov. 14 and debt service is not due until Dec. 1, at which time S&P understands that there is just an interest only payment of $1.9 million. According to the state, the Senate could have up to $10 million on hand; however, in the press the Senate Majority Leader was quoted as saying that he would prioritize paying salaries over debt service for the building, which is a credit concern. Furthermore, even though the Department of Administration could pay rental payments from other legally available funds appropriated to the department under the terms of the lease it has not yet done so.
If the state works out an agreement and meets its contractual obligation over the next 90 days S&P would remove the ratings from CreditWatch, but would likely revise the outlook to stable rather than back to positive because this situation has illustrated a departure from what has been very strong budget management and is not commensurate with higher rated credits. However, if the stalemate continues and increases, in S&P’s view, the likelihood of nonpayment or the nonappropriation leads to a termination of the lease and an extraordinary mandatory redemption of the bonds, then S&P could lower S&P ratings on the state as well as associated ratings by several notches.