CHICAGO — With the start of a new fiscal year looming, Iowa lawmakers moved towards adjourning late Wednesday or Thursday after hashing out differences on spending in a new budget while talks continued among Minnesota officials seeking to stave off a government shutdown.

Moody’s Investors Service on Wednesday said in a special report that if Minnesota leaders fail to reach an agreement or Iowa lawmakers hit a snag, a government shutdown in either state shouldn’t hurt their credit standing.

“Even though neither state has contingency plans in place for a shutdown, both Iowa and Minnesota have investment-grade ratings with stable outlooks and neither is likely to experience rating pressure, especially if any shutdown is of short duration,” said Moody’s analyst and the report’s author, Kimberly Lyons.

The details of the actual budgets eventually signed into law remain the central factor for analysts in assessing each state’s financial position.

“Whether the experiences ultimately turn out to be more positive or negative from a rating perspective will depend on the long-term implications contained in the final state budgets,” Lyons wrote.

Debt service repayment is not at risk in Minnesota, as its triple-A rated general obligation bonds and most other debt obligations feature an ongoing appropriation.

In a further affirmation of the state’s ability to pay debt service during a shutdown, a state court judge’s ruling Wednesday allowing critical and core services and functions to remain operational included payment of state debt obligations.

Most of Iowa’s debt also benefits from an ongoing appropriation, but a lease payment is due on some outstanding certificates of participation on Aug. 1, Lyons said.

“The absence of statutory or constitutional contingency plans in both Minnesota and Iowa creates uncertainty over how funds can be appropriated and which areas of government can continue to be funded,” Lyons said.

Many states have struggled harder this year to reach an accord on spending as they deal with expiring federal aid, resistance to tax hikes, and pressure not to cut any deeper into services.

In both Iowa, which fared well during the recession and has maintained healthy reserves, and Minnesota, which is dealing with a $5 billion deficit, political differences have hampered agreements.

Iowa’s Democratic-controlled Senate and Republican-controlled House fought over spending levels while Republican Gov. Terry Branstad pushed for a two-year budget instead of the traditional one-year plan.

Lawmakers agreed Wednesday and were expected to vote on the final bills that make up a $6 billion budget that holds education spending steady in fiscal 2012 and increases it by 2% in the second year. Lawmakers agreed to approve spending for the next two fiscal years, but they did not include property tax reforms also sought by Branstad. 

The state expects to close out the current fiscal year with more than $400 million in cash reserves and another $135 million in an emergency reserve.

The budget does not authorize any new borrowing. In their most recent reviews, credit agencies affirmed Iowa’s top issuer ratings.

In Minnesota, which saw a shutdown in 2005, leaders kept a tight lid on the status of talks Wednesday.

Gov. Mark Dayton, a member of the Democratic-Farmer Labor party, wants the GOP-controlled Legislature to approve a mix of cuts and an income tax hike in the two-year, $64 billion budget to address $5 billion of red ink, while Republicans want more cuts.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.