Moody's downgrades Minnesota debt outlook

Moody’s Corp. Tuesday downgraded its outlook on the state of Minnesota’s general obligation bonds and state-supported debt to negative from stable.

The ratings agency at Moody’s Investors Service, New York, said the downgrade reflects Minnesota’s ongoing financial and economic weakness caused by revenue shortfalls and sizeable budget deficits.

Despite the downgraded outlook, Moody’s affirmed the state’s Aa1 general obligation rating and the Aa2 rating assigned to the state-supported debt.

The debt concerns Moody’s highlighted in its opinion stem from the state’s $1.2 billion shortfall in its 2010-2011 biennium, which is largely due to revenue shortfalls.

Moody’s also said the state is vulnerable to further downward revenue revisions, given the uncertain timing of an economic recovery and the expected drop-off in federal stimulus funds.

“Given the one-time actions already incorporated in the adopted budget ... the state has reduced flexibility to address continued budget challenges,” Moody’s said in its report.

On the bright side, the state has a fundamentally strong economy. Also, it isn’t dependent on any one sector, which can lead to economic weakness beyond national trends. Moody’s said per-capita personal income (PCPI) is consistently above the U.S. average; for the past five years the state’s PCPI has been between 105 and 109 percent of the national average.

But Minnesota’s economy has been sluggish lately, according to the report.

Although the state has historically lagged the nation in unemployment, the rate rapidly grew to mirror the nation in the first quarter of 2009. Since then, the state unemployment rate has again fallen below the national rate. The Minnesota unemployment rate for December 2009 was 7.4 percent, below the national rate of 9.7 percent during the same period.

In summary, Moody’s says, “Minnesota continues to deal with fiscal and economic stress, which has resulted in budgetary pressure and significant liquidity strain. The measures taken by the state thus far are not of a recurring nature, and available reserves have been substantially depleted. This leaves the state facing the challenge of addressing ongoing structural imbalance with limited resources in an uncertain economic environment.”

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