Moody’s Gets Negative on Minnesota, Citing Fiscal Weakness
CHICAGO — As the Minnesota Senate moved yesterday to advance a $1 billion capital budget, Moody’s Investors Service sent a credit warning by shifting its outlook on the state’s Aa1 rating to negative due to ongoing fiscal weakness and heavy reliance on one-shots to balance its books.
Moody’s affirmed the state’s Aa1 general obligation rating on $4.2 billion of outstanding debt.
The credit revision to negative from stable comes as lawmakers return to work to face a $1.2 billion deficit in the current two-year, $57 billion budget that runs through June 30, 2011.
The state’s last forecast, released in early December, revised revenue downward, opening a new budget hole, and warned of a $5.4 billion deficit in the next biennial cycle. A new forecast is expected early next month with those figures setting the stage for legislative action.
The state is especially vulnerable to ongoing fiscal weakness due to its depletion of reserves and reliance one-time measures like bill payment delays, fund transfers, and federal stimulus funds to erase $4.6 billion of red ink going into the current budget cycle, straining the state’s liquidity and limiting its options.
“Minnesota’s vulnerability to further downward revenue revisions given the uncertainty surrounding the timing and the strength of the economic recovery is increased by the drop-off in federal fiscal stimulus monies scheduled for December 2010 which, as in other states, has been used substantially to prop up the state’s budget,” Moody’s wrote. “These factors will pose significant challenges as the state tries to stabilize its finances.”
Poor revenue collections have put a growing strain on the state’s liquidity with the statutory general-fund cash position expected to reach a monthly low point of negative $150 million in April.
“While the state’s ability to maintain a reserve of $350 million in a cash-flow account has been noted in prior reports as a credit positive, it is now apparent that the state will likely deplete this cushion as well,” Moody’s reported.
The state is delaying corporate and sales tax refunds, a $52 million university payment and $432 million in K-12 school aid payments to conserve cash.
The government might have to turn to a bank line of credit or short term borrowing to address liquidity, analysts warned. Such a move would mark a first since 1985.
About 70%, or $827 million, of the revenue decline that has led to the $1.2 billion deficit comes from a drop in income tax collections due to a larger-than-anticipated decline in wages. It’s the first time in 40 years that Minnesota income tax receipts have declined.
It remains unclear how the state will address its new deficit.
Republican Gov. Tim Pawlenty — who will deliver his final state of the state address tomorrow — has said he opposes any major tax increases. The Legislature’s chambers are controlled by Democrats. He opposed the operating budget approved by lawmakers last year and slashed $2.7 billion from it.
With the deficit looming, the Legislature is moving quickly to advance a $1 billion bonding bill with the Senate poised to pass a bill yesterday and the House expected to take up its version next week.
Pawlenty last month proposed an $815 million bonding bill that relies on $685 million of general fund supported bonding which he characterized as “affordable.” Democrats want a larger capital spending package as a means to spur job creation.
Lawmakers also will face a renewed push from the Minnesota Vikings for state help in funding a new stadium. Past proposals fell by the wayside.
Pawlenty, who is not seeking re-election, has said he would like a resolution. A new professional football stadium for the National Football League team carries an estimated price tag of $870 million.
Though strained, the state’s rating from Moody’s does remain strong, just one notch below top marks.
It benefits from strong economic fundamentals, including relatively diverse employment mix, and high wealth, low-to-moderate debt ratios, strong debt management, and the use of quarterly forecasting that allows the state to make adjustments.
Minnesota also benefits from well-funded pension ratio of 87% as of the close of 2008 and a relatively low other post employment benefits unfunded liability of $755 million with an annual required contribution equivalent to 0.4% of annual revenues.
The state carries top marks of AAA from Fitch Ratings and Standard & Poor’s, though Fitch assigns a negative outlook.