Reserves and balance help return Minnesota to S&P's AAA graces
CHICAGO – With flush reserves and structurally balanced budgets bolstered by new pension reform measures, Minnesota won back S&P's top rating.
S&P Global Ratings raised Minnesota's general obligation and issuer default rating to AAA from AA-plus Wednesday, restoring the status it lost in 2011 when state leaders turned to one-time maneuvers to cut budget gaps. The GO upgrade impacts $6.4 billion of debt.
Appropriation-backed debt moved up one notch to AA-plus and moral obligation backed debt issued for higher education moved up two notches to AA-plus. The change moves the state's enhancement program for school districts and local governments up to the AAA level. The latter is rated on par with the state GO to reflect the state's commitment under a standing appropriation to pay debt service from the state's general fund if the participant fails to meet its debt service obligations.
"The upgrade reflects the state's improved financial performance, return to strong budget management and structural budget balance, and the 2018 Omnibus Retirement Act, which is expected to decrease pension liabilities through benefit reform and increased contributions," said analyst Eden Perry.
The review came ahead of the state’s annual general obligation issue that is set for a competitive sale on Aug. 2. The state will issue $619 million of new money to fund capital projects in recent capital budgets.
The deal includes $397 million of general obligation various purpose bonds, $206 million of GO-backed trunk highway bonds, and $16 million of taxable GO various purpose paper. After the issue, Minnesota will have $2.7 billion of authorized but unissued GO debt.
Fitch Ratings affirmed the state’s AAA rating and stable outlook and Moody’s Investors Service affirmed its Aa1 rating and stable outlook earlier this week.
The state’s credit profile benefits from a deep and diverse economy anchored by the Minneapolis-St. Paul region, improved financial results that includes the restoration of reserves, and moderate debt levels that limit debt service to state revenues. Reserves currently stand at nearly $2 billion, including $350 million in the cash flow account, $40 million in the stadium reserve account and $1.6 billion in a budget reserve.
While the state’s leadership remains divided, its coffers are flush and the session ended with agreement on pension reforms. Last year, pension legislation floundered and Gov. Mark Dayton opposed the legislature’s tax cut package. Dayton is a member of the Democrat-Farmer-Labory Party and is not seeking re-election this year. The legislature is controlled by Republicans.
“In our opinion, with the 2018 legislative session, Minnesota has returned to its historically strong budgeting practices after a political standoff during the 2017 legislative session,” S&P said.
The state won praise for showing “a commitment” toward actively managing its liabilities by adopting the pension funding and benefit changes. tempered by concerns that future risks loom due to a failure to move to an actuarially based funding model.
“Should Minnesota's use of a statutory funding formula, rather than an actuarially based funding formula, translate into weaker funded levels, or if budgetary pressures, including rising health care costs and weaker economic growth, challenge the state's commitment to structural balance and reserve replenishment, there could be downward pressure on the rating,” S&P warned.
“Minnesota’s financial health is better than ever, and these AAA ratings are proof of the progress we have made,” Minnesota Management and Budget Commissioner Myron Frans said in a statement. “One of the key reasons for our AAA ratings by S&P and Fitch is because of the Pension Reform Bill that unanimously passed by the Minnesota Legislature this year.”
S&P last raised Minnesota to AAA in 1997 but dropped it to AA-plus in 2011.
Dayton took office earlier that year inheriting billions in red ink. The governor and lawmakers struggled over how to close the gap settling on a plan that tapped tobacco settlement revenues, reserves, and pushed off school aid payments. With a DFL majority in 2013 Dayton won a tax hike package which along with an improving economy allowed the state to achieve structural balance.