CHICAGO – The fate of lease payments that fund a small piece of Minnesota’s state-supported debt is up in the air amid a prolonged budget standoff between Gov. Mark Dayton and the legislature’s GOP majorities.

The Minnesota Supreme Court Thursday upheld Dayton’s veto of the legislature’s budget appropriation. That appropriation includes monthly lease payments used to back $80 million of certificates of participation issued in 2014 for a new Senate Office building.

He stripped the funding from the budget in an attempt to pressure GOP leaders to return to the table over their tax cut package. The high court also said the legislature has access to sufficient funds – at least $26 million—to get by until the new session begins Feb. 20.

Minnesota Senate Office Building
The dispute centers on an appropriation used to service debt issued to build Minnesota's Senate office building.

The ruling gives Dayton a victory but leaves the COPs in limbo. The Senate has said it won’t make any lease payments until it has the needed appropriation.

Funds are on hand to cover the December payment, but S&P Global Ratings warned the state earlier this week that it’s watching the monthly payment issue.

S&P said it will assume that, if the Senate doesn't have funds on hand after the Dec. 1 debt service payment, the Department of Administration will continue to make the lease rental payments under the terms of the bond documents to make the June 1, 2018, debt service payment, "consistent with a high investment-grade rated state.” S&P rates Minnesota AA-plus with a stable outlook.

S&P also said the issue has introduced an element of political risk into the state's credit profile. It briefly placed the state on CreditWatch with negative implications in June, after Dayton's veto of the legislative appropriation.

On Thursday ahead of the court’s ruling, the Legislative Coordinating Commission freed up funds for lawmakers but included in the resolution a ban on using the money to make the monthly lease payments.

Minnesota Management and Budget Commissioner Myron Frans later issued a statement confirming that it would make the December debt service payment from monthly payments it had previously received from the Senate under a court-approved agreement that expired last month, which had long been the plan.

On the subject of monthly lease payments going forward, the statement said the “Senate is legally obligated to make monthly lease payments on the Minnesota Senate Building and has the necessary funds available as determined by the Supreme Court today."

“The next debt service payment is not due until June 1, 2018, which gives the Legislature plenty of time during the 2018 legislative session to pass a budget that includes funds to pay the Senate’s monthly lease payments,” the statement added.

But that still leaves in question whether the monthly payments beginning in December will be made. MMB spokesman Keith Hovis on Friday would say only: “We expect them [Senate] to fulfill their obligation by seeking an appropriation, and will monitor the situation, as we have been.”

Senate Republican spokesman Bill Walsh said Friday such an appropriation to fund the legislature’s obligations would be the first bill submitted when the legislature convenes in February but not before. Without an existing appropriation to support the lease payments he said no payments would be made until the legislature convenes and takes up the matter.

S&P analyst Eden Perry said Friday the rating agency continues to monitor the political situation and said its expectation remains that the state -- which has demonstrated a commitment to funding the lease rental payments by covering the November monthly payment -- will make the monthly payments in the absence of a Senate payment. That’s the expectation for a “high-rated state,” Perry said.

The state’s high court initially ordered mediation earlier this fall but it failed and the two sides remain at a standoff. Dayton is a member of the state’s Democratic-Farmer-Labor Party.

S&P added there are a number of ways the June payment could be handled either through mediation or an emergency appropriation, but those require some action either by the court or legislature.

Fitch Ratings rates the state AAA and Moody’s Investors Service has the state at Aa1. Neither raised prior concerns over the appropriation issue, saying the state had time to resolve questions, and Fitch said the state has the option to fund COP debt service from either the Department of Administration.

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