Minnesota's upbeat fiscal story pays off

Myron Frans, the state government's chief financial officer, last week was acting a little like his corporate counterparts after their companies have just reported a good quarter, what with his eagerness to sit down for a conversation.

Not only did the state sell more than $1 billion in state bonds on a single day, a big chunk of them refinancing more expensive debt, there was also positive news from the big credit rating agency Standard & Poor's.

S&P did not actually upgrade the state's debt, leaving its rating at AA+, but it said an upgrade back to the highly coveted AAA rating is likely within a couple of years if the state keeps managing its finances well.

"It's nice to have somebody else write some good things about you," said Frans, the commissioner of Minnesota Management & Budget. "When I told the governor, he was really very pleased."

The state's budget reserve and better-than-expected revenue in the most recent fiscal year were not the only good parts of the story reflected in the reports of the rating agencies. There's also the fact that Minnesota has the capacity to carry a lot of debt because of its fundamentally solid economy.

Among the facts Frans and his team just shared with the credit analysts is that Minnesota's per capita income is 106 percent of the national figure, a gap that has generally widened over the past 20 years. Minnesotans are a hardworking bunch, too, as the labor participation rate here is second-highest among the states and much higher than the national rate.

Frans said an appealing part of his pitch to the rating agencies is that in industry after industry, Minnesota has about the same percentage of people working in them as does the national economy as a whole. That means the state doesn't have to rely on one or two key industries for jobs.

There are, of course, states here in the Midwest that would love to borrow at a cost of less than 2.5 percent per year for 10 years. Investors this week were trading Illinois 10-year bonds at a yield of about 4.25 percent.

As Bishop dryly noted, in Illinois bonds "you've got a whole different story." It's actually a great example of what happens to a state credit rating with inept management of the state checkbook, even with a fundamentally solid economy.

Illinois was dead last among the 50 states for its financial health, as ranked this summer by the Mercatus Center at George Mason University. Right there with Illinois at the bottom of the list is the state of New Jersey. Both of these states are more affluent than the country as a whole and both have Grand Canyon-sized holes in their public pension systems.

In addition to underfunded pension plans, the Wall Street Journal reported this year that New Jersey had an unfunded liability for health care benefits of about $53 billion.

To any S&P credit analyst, of course, a dollar owed to retirees is pretty much the same as a dollar that's owed to bondholders for interest. That's why in May, S&P took a look at the collapse in court of the latest pension reform plan in Illinois and put the state's bond rating on its list for a possible downgrade. S&P said it was going to look closely at whether the state would soon adopt a "credible" budget in addition to making progress whittling down its unfunded pension liability.

A credit rating downgrade for Illinois appears to be coming. What's unclear is just how many notches it's going to fall.

We here in Minnesota can look at Illinois and just shake our heads at what goes on there, a state where four governors in living memory have ended up in jail.

But Minnesota has some of the same problems as Illinois has, just not as severe. Minnesota has an unfunded pension liability, too, but it was ranked by Moody's as only the 44th worst among the 50 states.

As for stumbling into the start of the new fiscal year without managing to first get a state budget approved, that's been known to happen here, too. Now that the AAA rating by S&P seems again within reach, it's worth remembering that it was the 2011 partial government shutdown that cost Minnesota its top rating. The ratings agency Fitch pulled its top rating days after the shutdown started that summer. S&P pulled its AAA rating in September.

At the time, S&P said the state's economy was relatively strong and its debt load was easily manageable, but AAA-rated states are just not the kind of states where the public officials can't seem to adopt a sensible budget.