State's bond ratings downgrades flag fiscal problems, but may be less costly than feared

Earlier this month, before lawmakers in St. Paul reached a budget deal with the governor, Fitch Ratings in New York stripped Minnesota of its top AAA credit rating, pulling it down half a notch. In the process, Fitch scolded the state for a pattern of short-term budget fixes.

The criticism sounded familiar to political leaders who remembered Minnesota's fiscal problems in the 1980s.

Back then, a nationwide recession had poked a hole in the state's economy. And due to a peculiar tax deal made a few years prior, the state was spending more money than it took in. Things were so bad the state didn't even have enough money to pay its short-term bills, and had to borrow to do so.

You might surmise that political acrimony is what kept politicians from fixing the budget, as was the case this past month. Not true in the 80s.

"Actually compared to what we've witnessed here the last month, it was like a love fest," said Roger Moe.

Moe was the Democratic Senate majority leader at the time, during Republican Gov. Al Quie's administration. Back then, Moe said, Minnesota's shoddy forecasting methods kept fouling up the budget.

"What was happening was, the forecasts would come in," Moe said. "Revenues were down, we'd negotiate out a way to balance the budget, the governor would call a special session, and we'd pass a bill.

"And the next forecast, the economy was going further and further into the tank, so every forecast we made was off the mark — unfortunately, on the negative side. So a few months later, we'd have to go back in and try it again," Moe said.

That meant five special legislative sessions in the early 80s. One special session even ran concurrent to a regular session. To fix the deficit, the governor and legislature agreed on some tax hikes and spending cuts. But they also implemented measures some regarded as "smoke and mirrors" budget fixes, including the now-infamous school aid trick, where the state deferred payments to schools.

The ratings agencies sized up the situation and, in their own special way, essentially said, "Minnesota, you've gotta be kidding."

MINNESOTA DOWNGRADED

"Standard & Poor's told state officials today that the state's continuing financial problems are responsible for the rating drop," said Pat Kessler, in a live report for Minnesota Public Radio in 1982.

In that report, Kessler explained how losing the AAA rating, the best credit rating available, would hurt the state.

"The lower rating means it will cost the state more money to borrow money and more to sell bonds on the open market. That extra cost will be passed along to taxpayers," he said.

Moody's, another ratings agency, soon followed S&P, also knocking Minnesota down to an AA rating. Fitch wasn't in the ratings game until several years later.

Following the Quie Administration, Democratic Gov. Rudy Perpich and Republican Gov. Arne Carlson both worked to get Minnesota back on better financial footing, but it wasn't until the late 90s that the state could tout AAA status from all the ratings agencies. Carlson said it was his big goal.

"And the reason was very simple. And that is that the guidelines set out by the bond agencies was good financial planning," Carlson said.

Carlson is credited with taking several important steps in righting Minnesota's ship. He raised the sales tax, demanded that schools be paid back in full for their deferred payments, and rebuilt the state's reserves. Then he made several visits to the ratings agencies to argue that Minnesota was once again fiscally responsible and deserving of the highest credit rating.

Carlson has a particularly strong memory of his meeting with Moody's analysts.

"I think everyone in that room was 35 (years) or under. They all wore the same dark suits, the same dark ties. I wish I had the store that sold the suits to those Moody's executives," Carlson said with a laugh.

Carlson said the dark suits grilled him and his staff for two hours. He actually enjoyed how thorough they were. Then they headed back to Minnesota.

"I remember when we got off the plane and home there was a big champagne bottle at my door. And (it) was from my chief of staff Bernie Oman. It said, 'Congratulations. You got it.' It was very emotional because we all thought we kind of had arrived," Carlson recalled.

TAKING IT PERSONALLY

By 1997, Minnesota had AAA ratings from Moody's, S&P, and Fitch.

It was a big victory for Carlson. But how much had it actually cost the state to endure the lower credit ratings and higher interest rates?

"It's not a phenomenal amount," said Peter Sausen, a former state finance official.

Sausen said credit rating downgrades in the 1980s likely cost an extra $100,000 on a typical bond issue — a tiny amount in the $20 billion state budgets of the time.

Sausen notes that in 2003, when Minnesota lost its AAA status from Moody's again, it didn't make a difference in terms of the interest rates offered to Minnesota for its bonds, or in investors' appetite for them.

However, a rating downgrade is a serious reflection of fiscal irresponsibility, Sausen said. And it means you no longer have bragging rights. That's how he felt in the 80s.

"I give the example, my own personal example, of watching television one night," Sausen said. "The state of Virginia comes on in an advertisement trying to lure businesses, saying 'We're a AAA state. Come and enjoy doing your business in a AAA state.' And I thought 'I'm really jealous of that. I wish we could do that.' "

Bill Blazar of the Minnesota Chamber of Commerce said the losing the AAA rating in the 80s hurt Minnesota's pride, but probably not the state's economy.

"People took that personally. This can't be in the state that works," Blazar said.

"I don't know that any business executive or entrepreneur said 'I'm not going to do business here because you got your bond rating lowered,' " Blazar said. "In fact, I'm virtually certain they didn't think that."

Businesses were probably more concerned about whether taxes would go up, Blazar said, and likely that is still the case.

1982 ALL OVER AGAIN

Concerned about the state's reputation, Blazar points to the unfavorable news headlines that have drawn national attention to Minnesota, including a credit downgrade by Fitch just this month.

"Our state's closed down, bond rating lowered, it's hotter than Haiti. Throw in the tragedy of the 35W bridge, and folks worry about the Minnesota brand," he said.

That run of bad news makes Blazar feel like it's 1982 all over again. And as was done then, Blazar thinks Minnesota officials should now jump on a plane and chat with the ratings agencies.

The goal should be to convince the ratings agencies that the state has enacted important financial reforms in its recent budget deal, he said.

Others, like Arne Carlson, a critic of the Gov. Mark Dayton's budget deal, feel the state should visit the ratings agencies for a completely different reason: to relearn some lessons about fiscal responsibility and how to implement them.

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