U.S. debt crisis threatens to drag down ratings of state's cities, schools

  • Article by: BRAD SCHRADE and RACHEL E. STASSEN-BERGER , Star Tribune
  • Updated: July 29, 2011 - 9:52 PM

The nation's debt limit standoff now is threatening the good credit of nearly a dozen top-rated local governments and school systems in Minnesota, as they grappled Friday with news that their prized AAA bond ratings could tumble because of troubles in Washington.

The cities of Minneapolis and Wayzata; Hennepin and Ramsey counties; Edina schools, and six other local government entities learned that Moody's Investors Service included them on a list of 177 jurisdictions nationwide for a potential downgrade in credit worthiness. That rating is equivalent to an individual's credit score. If it goes down, the cost of borrowing for such things as schools, roads and other infrastructure goes up.

"It makes borrowing more expensive for all kinds of projects," said Brandt Richardson, administrator in Dakota County, which received notice on Friday morning that the county is under review. "To have the events in Washington impact our credit rating, no one in our county is going to be happy about that."

Washington has until Tuesday to strike a deal that would avert a U.S. default and local government officials said they hope they will withstand the process with their AAA bond ratings intact. But Friday's notices were another indicator that the high stakes brinkmanship unfolding in the nation's capital has far-reaching implications.

Many factors at play

A Moody's spokesman said not every triple-A rated local jurisdiction in Minnesota will undergo a review.

Of the 28 with that designation, 11 received notices that their credit rating could be downgraded. Among those were Dakota and Washington counties, the cities of Maple Grove and St. Louis Park, and school districts for Minnetonka and Wayzata.

A Moody's spokesman said such factors as dependency on federal revenues, reliance on capital markets, exposure to overall economic cycles and cash reserves played into which entities are being reviewed. Nationally, the review list includes 162 local governments, 14 housing finance programs and one university.

"What happens now is we see what happens in Washington over the next week," said David Jacobson, a Moody's spokesman. He said that if the United States goes into default and loses its AAA bond rating, Moody's will begin the process of determining whether to downgrade local governments on the review list. Local and state governments rated below AAA could also face possible downgrades. Moody rates the state of Minnesota AA+, down from the state's one-time AAA rating.

Jacobson said the local entities that were notified this week were "deemed more susceptible or vulnerable to a downgrade than the folks who are not placed on review."

Minneapolis officials say their position is strong enough that it can weather even a U.S. default. Kevin Carpenter, the city's chief financial officer, notified city leaders Friday by e-mail that his department "strongly believes" the city's credit rating would remain intact because the city has a relatively small reliance on federal revenue and employment, has strong cash reserves and a history of good fiscal management that "should more than offset" any negative factors.

"While it's concerning, we don't believe it's a threat to the city," said John Stiles, a spokesman for Mayor R.T. Rybak.

Even though it made the Moody's list for review, the Edina school system received an AAA rating from another rating agency, Fitch, in the past week. Margo Nash, the school system's director of business services, said Fitch analysts seemed more focused on the state shutdown and its resolution. She said the system is doing everything within its power to maintain sound financial management.

"I would be hopeful that Moody's would see the same positive outlook," Nash said.

It was Fitch that recently downgraded the state's AAA rating because of habitual borrowing and other one-time budget fixes.

Ripple effect possible

A U.S. default could reach well beyond the 11 local government bodies under review, said Jim Schowalter, Minnesota Management and Budget commissioner.

"If the U.S. isn't AAA credit, that threatens everything," Schowalter said. "If the U.S., which protects and guides the states' credit, is decreased that is going to have a ripple effect on the economy that is really profound."

Schowalter would expect all ratings agencies to re- assess the state's credit soon as well, although the state, unlike the local governments, has not been warned of a potential downgrade. The state is planning to let a series of bonds worth more than $1 billion in the coming months, including the tobacco bonds that helped fill in the budget gap and ended the recent shutdown.

The federal mess could also exact a painful toll on Minnesota businesses.

David Olson, president of the Minnesota Chamber of Commerce, said his organization has encouraged Congress to raise the debt ceiling. He said chamber members are feeling nervous.

"I think they're feeling generally pretty concerned," Olson said. He said businesses that just suffered through a state government shutdown now must cope with massive economic uncertainty at the federal level. "We were going through the same conversation here a few weeks ago," he said.

brad.schrade@startribune.com • 612-673-4777 rachel.stassen-berger@startribune.com • 651-292-0164

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