CHICAGO – S&P Global Ratings warned Minnesota it remains on alert as Gov. Mark Dayton’s budget standoff with the legislature’s majority Republicans – which has tangled up the repayment stream of a small piece of state-supported debt – drags on.
“The immediate credit risks have been alleviated because Minnesota has demonstrated a commitment to funding the lease rental payments to meet the debt service on the 2014 certificates of participation,” S&P wrote in a special commentary published Tuesday noting the dispute has not yet impacted the state’s AA-plus rating and stable outlook.
“However, the failure to resolve the political dispute and approve sufficient funding for the COPs' debt service has introduced an element of political risk to Minnesota's credit profile,” analysts added.
Dayton, a member of the Democratic-Farmer-Labor Party, vetoed the House and Senate’s $129 million appropriation in the $45.6 billion fiscal 2018-2019 budget in an attempt to pressure GOP leaders back to the bargaining table to trim the size of tax cuts they included in the spending package. An outright veto of the budget could have shut down government.
The $80 million of COPs funded a new Senate office building and are supported by a lease appropriation; the Senate draws from its appropriation to make monthly lease payments.
The GOP went to court seeking to overturn the veto. The lower courts sided with the GOP and said the veto violated the separation clause of the state constitution, but the Minnesota Supreme Court in September tossed that decision and sent the two sides into mediation to resolve their differences. The mediation failed and the dispute has not yet been resolved.
Under an agreement between the two sides, monthly lease payments toward the December debt service payment continued. That agreement has ended and it’s unclear whether the December monthly payment that would go towards the June debt service payment will be made. The Senate has warned it’s so low on cash that it will have to lay off staff and possibly shut down in January.
S&P said it would be monitoring the situation to determine the effects on budgetary management and financial performance. “Finally, and most important, we assume that if the Senate does not have funds on hand after the Dec. 1 debt service payment, the Department of Administration will continue to make the lease rental payments under the terms of the series 2014 COP documents to make the June 1, 2018, debt service payment consistent with a high investment-grade rated state,” analysts wrote.
At the start of the dispute, S&P put the state’s rating on negative watch due to the lack of an appropriation for the COPs. Analysts took the credit off watch after the two sides agreed to the funding stipulation.
“The regular legislative session convenes Feb. 20, 2018, well in advance of the next debt service payment on June 1, 2018, and Minnesota Management and Budget indicated that the legislature could enact legislation to restore the biennial appropriations, including funding for lease payments sufficient to cover debt service on the COPs in the fiscal 2018-2019 biennium,” S&P said.
There are a number of ways the June payment could be handled either through mediation or an emergency appropriation, but those require some action either by the court or legislature.
Fitch Ratings rates the state AAA and Moody’s Investors Service has the state at Aa1. Neither raised prior concerns over the appropriation issue, saying the state had time to resolve questions. The state has the option to fund COP debt service from either the Department of Administration's budget or the Senate's budget, Fitch previously said.