Minnesota and the U.S. government have suffered recent downgrades in their credit ratings. The negative news could worry investors and may eventually lead to higher borrowing costs for federal, state and local governments. However, it is important to take note of the reasoning behind the recent downgrades: credit rating agencies are concerned about the lack of long-term solutions to ongoing budget deficits.
Three major rating agencies assess the credit-worthiness of governments and businesses: Fitch Ratings, Moody’s and Standard & Poor’s. The highest possible rating from any of these agencies is a AAA. Last week, for the first time in history, Standard & Poor’s lowered the United States’ credit rating from AAA to AA+. In July, Fitch downgraded Minnesota’s credit rating from AAA to AA+. And Moody’s recently issued a warning that it, too, is concerned about Minnesota’s long-term financial health, although it did not actually downgrade the state’s rating. Minnesota continues to maintain a AAA rating with Standard & Poor’s.
There is an important lesson in the recent spate of downgrades and warnings: If Minnesota policymakers want to restore the state’s credit rating, they must start passing long-term budget solutions.
Minnesota is being considered a slightly higher credit risk because the state is facing a structural deficit, meaning that our revenues are not matching up with our expenditures over the long-term. Instead of finding a sustainable solution this past session, state leaders agreed to delay payments to schools and issue one-time tobacco bonds, a significant strike against the state in the eyes of credit agencies. The outlook for FY 2014-15 already shows Minnesota with a nearly $2 billion deficit. Moody’s cites this “reliance on one-time measures to solve the $5 billion budget gap in the current fiscal 2012-13 biennium and the likelihood of future structural budget gaps as a result of the use of the one-time budget measures” as a primary reason for its negative outlook on Minnesota.
The rating agencies take no position on the appropriate mix of revenue increases and spending cuts – they just want to see permanent fixes. However, we have long argued that policymakers should be using a balanced approach to resolving the state’s structural budget deficit, including both spending cuts and revenue increases. Relying on cuts alone would negatively impact the quality of our educational system, access to affordable health care, and the level of services available for seniors and persons with disabilities. These are all investments that are essential to improving the quality of life in our state and building our future economic success.
Minnesota’s creditworthiness is being called into question. To stop our ratings from slipping further in the wrong direction, policymakers should start passing budgets that balance cuts to services with increases in revenues, and fund our long-term priorities in a sustainable way.