Standard & Poors downgrades Minn. credit rating

Minnesota can no longer tout a top flight credit rating. The state lost its last remaining triple-A rating on Friday.

Standard & Poor's has now followed Fitch Ratings and Moody's Investors Service in downgrading the state by one notch below the top rating. The change comes just days before the state issues for sale nearly a billion dollars worth of general obligation bonds on Tuesday. Financing that debt could be more costly as a result but probably not by much, analysts say,.

S&P echoed the criticisms leveled by the two other big credit rating agencies this past summer, citing the state's short-term solutions to long-term budget problems. The argument for pulling down Minnesota's bond rating might sound familiar by now to state officials.

Quick fixes include deferring payments to schools, raiding financial reserves, and using revenues from a tobacco industry settlement to finance more debt. S&P analyst Robin Prunty said her team still believes Minnesota has a lot of strengths, including a diversified and relatively strong economy. But that's not what earned the downgrade, Prunty said.

"It wasn't economic, it wasn't the debt and liability profile, and a lot of their financial management policies remain strong. That hasn't changed," Prunty said. "But at the AAA ratings threshold we would see — and have seen with a lot of the other states — more structural solutions to deal with the budget gap."

Structural solutions means getting taxes and spending aligned.

Seven states still have triple-A ratings from all three ratings agencies; and seven still have the top grade from two of them.

"Certainly some of the things we've been going through don't look like triple A standard," said Jim Schowalter, commissioner of Minnesota Management and Budget.

He's chagrined by Minnesota's deteriorating credit ratings. But he doesn't take issue with the ratings agencies who are downgrading the state. Moody's did so back in 2003; Fitch did so this summer.

"That is a reasonable judgment of where we are at. That's why when we lost the Moody's and Fitch AAA, we said it will take a long time to get them back," Schowalter said. "Because they've made the assessment that the overall infrastructure and budget situation of the state is so damaged, that it's going to take a long time to get back into that triple a category. And that is what we lament,".

Not everyone is so chagrined by Minnesota's lower credit profile.

"I don't think it will have much impact," said Michael Brilley, who oversees bond investing for the Minneapolis-based mutual fund company Sit Investment Associates.

The credibility of credit rating agencies has plunged among investors because the firms' overly rosy ratings played such a big role in the housing market collapse," Brilley said. So investors aren't hanging on their every word.

What's more, he said, only falling down a notch from AAA isn't a big deal. He said Minnesota's debt is still regarded as a good credit risk, and S&Ps downgrade is unlikely to change the appetite for the state's bonds.

"It matters more to politicians than it does to investors," Brilley said. "The credit is still extremely high quality."

As with consumers, a reduced credit rating can translate to higher borrowing costs for states.

Brilley doesn't think Minnesota will have to pay much higher interest rates because of the rating downgrades.

Paul Rebholz, with Wells Fargo's public finance division in Minneapolis, agrees. Wells Fargo could be one of the bidders at Minnesota's bond sale on Tuesday. The company would buy the bonds and sell them to other investors.

Rebholz guesses that due to historic lows in interest rates for municipal bonds, Minnesota doesn't have much to worry about, even with today's downgrade from S&P. He said the change is likely to move the interest rate on the bonds only a few hundredths of a percent.

"On a relative basis, I expect the state will still do very well with the sale next week."

There are a number of municipal bond sales in the coming weeks that could make the environment more competitive, but on the whole, Rebholz said Minnesota trades well in the national marketplace. And the S&P downgrade probably won't change that.