Financial giant Standard & Poor's dropped Minnesota's debt rating Friday from AAA to AA+, ending an era in which the state could boast the most prestigious credit score.
The ratings agency said it could no longer give Minnesota its highest marks because the state continues to rely on shortcut budget fixes and dwindling reserves. Two other large rating agencies already have the state a notch below perfect, and one has signaled another drop may be coming.
While the AA+ rating reflects a "strong" belief that Minnesota can meet its financial obligations, the downgrade is a blow to the state's reputation as an economic engine that offers a stable financial environment. The lower rating could increase the state's cost to borrow money and reignite the feuds at the Capitol that were amplified during the state government shutdown.
Already, DFL Gov. Mark Dayton called S&P's decision "not surprising, given the fiscal irresponsibility of the Legislature's Republican majority." He said the state would not have had to use the one-off fixes if "my proposed budget had been adopted."
Republican House Speaker Kurt Zellers responded quickly, arguing that the state's budget crisis could have been avoided if Dayton had followed the GOP's view on fiscal policy.
"Our revenues do not match up with our spending," said Zellers, R-Maple Grove. "This is what we maintained all throughout the session [and] why we presented a budget to the governor that did not have shifts and did not have borrowing in it."
Dayton vetoed that budget, saying it relied on unchecked math and made cuts that would be catastrophic.
Zellers said the Republican budget was "incredibly fiscally responsible. ... He irresponsibly vetoed it."
Dayton's preferred solution -- higher taxes -- is anathema to Republicans.
Agencies look long-term
While the Capitol fight's sharp edges -- higher taxes versus lower spending -- have led to political paralysis and government shutdown this summer, Robin Prunty, managing director of Standard &Poor's public finance ratings, said the agency is "completely neutral" on whether taxes or spending cuts are best.
Rating agency officials say they simply want to see structurally sustainable budgets that rely on permanent fixes, not borrowing and shifts.
Prunty noted that S&P's downgrade of Minnesota debt had nothing to do with the agency's decision this summer to lower the U.S. debt rating.
The state's financial condition remains fundamentally strong, she said, but the use of reserves, borrowing and payment delays this year to solve a $5 billion budget gap could "contribute to continued structural imbalance."
To end this summer's 20-day shutdown, Dayton and the Republican Legislature agreed to shift $700 million in school payments, which came on top of an existing shift, and to borrow $700 million, backed by the state's 1998 tobacco settlement payments.
Such inelegant fixes have marked the state's budgeting for years, and Standard & Poor's is not alone in waving a red flag.
In July, Fitch downgraded Minnesota's bond rating from AAA to AA+.
The next month, Moody's issued a warning about the state's close to perfect Aa1, giving the state a negative outlook. Standard & Poor's had been the last agency to give Minnesota a sterling AAA rating.
"Unfortunately, we are no longer a triple-A state," said Jim Schowalter, Minnesota Management and Budget commissioner.
"It will take time and commitment to get our ratings back."
The last time the state was downgraded it took 15 years to regain a AAA rating, he said.
State debt 'still attractive'
The higher a state's credit rating, the lower the costs to borrow money.
Minnesota's new less-than-perfect status could mean taxpayers will end up footing a higher bill to maintain the state's debts.
It may soon see how much more.
Next week, the state plans to let $922 million in general obligation bonds. After that, it will let the so-called tobacco bonds.
Given the roiling world economy, Minnesota's hit might not be that bad, experts predicted.
"There is now so much fear about taking on [stock market] risks that investors are clamoring for bonds. State debt is still attractive to investors," said Scott Anderson, senior economist for Wells Fargo Securities.
But when the economy stabilizes, Minnesota's bonds may look less attractive to investors and the state may need to pay more to borrow money, he said.
Jeanne Boeh, co-chair of the Economics Department at Augsburg College, concurred with Anderson, noting that the state's debt rating is now the same as that of the United States.
"AA+ is still very good, and given the paucity of possible high-yielding investments in today's world, it will not likely lead to substantially higher interest rates," Boeh said.
The federal and the state downgrade reflect the endemic problem, Boeh said -- "short-term fixes to long-term structural deficits."
Staff writer Dave Phelps contributed to this report. Rachel E. Stassen-Berger • Twitter: @rachelsb