CHICAGO — Moody’s Investors Service on Monday shifted its outlook to negative on Minnesota’s Aa1 rating, punishing the state for political gridlock that drove lawmakers to erase more than half of a $5 billion budget deficit with one-time gimmicks that could worsen its structural imbalance.
“These negative factors put the state in a weaker position relative to other states within the same rating category,” Moody’s wrote in its report. At the same time it revised the outlook, Moody’s affirmed the Aa1 rating assigned to $6.1 billion of outstanding general obligation debt.
Aside from the strain of a growing fund gap, the state is challenged by reduced reserves that limit its flexibility to deal with shortfalls, and political gridlock that led to a three-week government shutdown and a budget solution short on long-term solutions.
The size of the state’s $5 billion deficit was driven in part by the state’s heavy usage of non-recurring maneuvers such as school payment delays and fund sweeps to deal with red ink since 2009.
Gov. Mark Dayton, a member of the state’s Democratic-Farmer-Labor party, sought an income tax increase on the state’s top earners to help balance the budget, but Republicans, who control the Legislature, argued for cuts.
Unable to resolve their budget impasse on $1.4 billion in spending, the state government shut down at the start of the fiscal year July 1. It remained mostly closed until Dayton agreed to a GOP plan to delay school-aid payments and issue tobacco bonds in exchange for policy concessions and Republican support for a $500 million capital budget.
Non-recurring revenues accounted for about 54% of the budget solution and spending cuts made up the rest, Moody’s wrote. The state will shift a total of $2.1 billion in school aid payments into the next budget year and will raise $640 million from the sale of tobacco bonds. Spending cuts will affect state agencies and reduce local government aid by $700 million and higher education by $350 million.
State projections earlier this year warned that a $4 billion deficit could loom in the next biennium if the government failed to better match its recurring revenues with ongoing expenses.
“The state will face significant obstacles in achieving structural budget balance in the next budget cycle as a result of the nonrecurring actions taken to date,” Moody’s wrote.
The state started draining its once-healthy reserves beginning fiscal 2009 to deal with budget gaps, and currently has just $275 million in reserve.
Minnesota’s credit strengths remain its diverse employment mix and high wealth levels, quarterly consensus forecasting and multi-year revenue and expenditure projections, executive authority to enact mid-year expenditure reductions if needed, low debt levels, and strong management, according to Moody’s.
The state also benefits from a relatively well-funded pension system that was at 85% at the end of 2010 and a low non-pension health care liability of $755 million. Pension reforms adopted in 2010 – which recently survived a legal challenge – are expected to generate $2 billion in savings over the next five years.
The Office of Management and Budget anticipates selling the tobacco bonds in two tranches this fall and the fall of 2012. Public Financial Management Inc. is advising the state. The state is planning to sell $600 million to $700 million of GOs late this summer or in early fall for capital projects.
Fitch Ratings recently downgraded Minnesota to AA-plus over its use of non-recurring revenues and accounting gimmicks amid political gridlock to erase red ink. Standard & Poor’s rates it AAA.
