CHICAGO – Minnesota heads into the market Tuesday with its annual summer bond sale, bolstered by the restoration of one of its triple-A ratings.
The state will take bids on nearly $788 million of new money and refunding general obligation bonds. Kutak Rock LLP is bond counsel and Public Resources Advisory Group is municipal advisor.
Ahead of the sale, Moody's Investors Service affirmed the state's Aa1 rating and stable outlook and S&P Global Ratings affirmed its AA-plus and positive rating.
The good news came from Fitch Ratings which on Thursday raised the state's GOs to AAA from AA-plus. The upgrade is due to both positive credit developments and the application of Fitch's revised criteria for U.S. state and local governments released in April.
The high-grade rating "reflects Minnesota's solid and broad-based economy, a revenue structure well designed to capture economic growth, a low liability burden, and strong control over revenues and spending that, in conjunction with a sophisticated approach to reserve funding, leaves the state exceptionally well positioned to manage throughout the economic cycle while maintaining a high level of financial flexibility," Fitch said.
Minnesota is benefitting from steady revenue growth "even after adjusting for the impact of tax increases" and growth prospects are strong, Fitch said. Its combined debt and pension obligations are low and GO amortization rapid.
Its reserve currently holds $1.6 billion, equal to 8% of 2016 spending, after a $600 million deposit late last year.
The current biennium is expected to end next June 30 with $2.7 billion in total reserves when counting an expected ending balance. Stronger revenue performance in the fiscal year that just ended is expected to raise estimates by $230 million.
"This upgrade, to Fitch's top credit rating, is a testament to the hardworking Minnesotans and businesses across our state who have led our economic recovery, and to the work our state has done over the past six years to right the fiscal ship," Gov. Mark Dayton said in statement.
The upgrade comes five years after Fitch stripped the state of its top marks for dipping heavily into reserves and relying on other one-time time fiscal maneuvers to balance its books amid divided political leadership. Moody's downgraded Minnesota before Fitch's July 2011 downgrade. The state lost its last triple-A when S&P followed in September 2011.
The state began to turn the corner in 2013 after enacting an income tax hike on top earners to tackle its structural deficit, allowing it to make good on deferred school payments and to rebuild reserves over the next several years. The tax passed after Dayton's Democrat-Farmer-Labor Party won a legislative majority.
Republicans have since won back the House but with coffers flush the current division has been over how to use a surplus, tax relief, the size of a bonding package, and transportation funding.
Fitch suggested a return to past practices could again hurt the state's credit.
"The rating is sensitive to the state's ongoing strong budget management, including adherence to well-developed reserve funding policies, as well as Fitch's expectations for continued strong economic and revenue growth prospects and a low long-term liability burden," analyst wrote. The state is required to transfer a portion of any surplus to its reserve until it reaches a targeted level of $2 billion.
The sale includes a $264 million series of various purpose GOs, $215 million of GO-backed trunk highway bonds, $7.5 million of taxable GO-backed trunk highway bonds, and $301 million of GO various purpose bonds. Trunk highway bonds benefit from the additional pledge of transportation related taxes and fees that flow to the state's highway fund.
The state has $6.5 billion of outstanding GOs and $1 billion of general fund appropriation bonds. School districts also will benefit from the upgrade because Fitch raised the state's credit enhancement program to AA-plus from AA.
The refunding will generate significant present value savings of about $39 million, said a state finance official. New money will fund projects approved in past capital budgets, known as bonding bills. The state's failure to adopt a bonding bill during its session this past spring has cut into the size of the upcoming transaction.
The state operates on a biennial cycle, typically passing an operating budget in odd years and a capital budget in even numbered years.
Lawmakers have been negotiating in an attempt to settle their differences on the bonding bill and new spending and tax cuts made possible by the surplus. A special session could be called later in August to vote on the plans.
The state reports in its offering statement that --based on prior agreements -- the bonding bill "could authorize $1 billion of state general obligation bonds, $47 million of state appropriation bonds and $300 million of general fund resources for capital projects." The tax relief bill under discussion would provide about $174 million in relief and increase spending by $79 million.
A pension bill also may join the special session agenda. Possible changes include a 0.5% increase to the employer contribution for the St. Paul Teachers Retirement Fund, a reduction in the statutory funding discount rate for the Teacher's Retirement Fund, and administrative changes for the Teacher's Retirement Fund, offering documents report.
Prospects are improved for a special session, according to local reports, but the offering statement warns: "No assurance can be given that Minnesota Governor Dayton will actually convene a special session, or that the proposed legislation described above would actually be considered in any such special session."
Moody's said its rating reflects strong financial management that has resulted in replenishment of budget reserves and a structurally balanced budget, sound management tools such as its revenue forecasting process and adjustable reserve mechanism and the governor's ability to unallot budgeted spending.
S&P wants more time to determine if the state warrants an upgrade.
"The positive outlook on Minnesota reflects the possibility we could raise the rating over the next year if the state establishes a longer track record of continued structural budget alignment and if the state's statutory pension funding method is improved," S&P said.
The state government also continues its search for a new debt manager. Kristin Hanson resigned earlier this year from her position after five years in the post to take a position with Public Financial Management Inc.