Minnesota heads into the market Thursday with its annual new money borrowing bolstered by two improve rating agency outlooks.
The state will take competitive bids on $879 million of general obligation bonds offered in two tranches: $568 million of GO various purpose bonds and $311 million of GO state trunk highway bonds.
Ahead of the deal, Moody’s Investors Service moved its outlook on the Aa1 rating to positive from stable.
S&P Global Ratings moved the outlook on its AAA rating to stable from negative.
The state’s budgetary and legislative actions took center stage in Moody’s reasoning.
“The positive outlook reflects key governance improvements in budget management and fiscal policy credibility and effectiveness including stronger pension contributions and pension funding over the last two years, two biennial budgets passed without major challenges, and a relatively conservative fiscal 2022/23 biennial budget that we expect will maintain the state's strong reserves and liquidity,” Moody’s said.
A future Moody’s upgrade would give the state three triple-A ratings.
Fitch Ratings affirmed its AAA rating and stable outlook.
The state has put concerns that the COVID-19 pandemic’s wounds would lead to poor budget decisions to rest with better-than-expected revenue collections and passage of a structurally balanced two-year budget.
"The revised outlook reflects our view that Minnesota's 2022-2023 biennium budget, which was crafted with the goal of long-term structural balance, coupled with strong revenue growth, support the state's AAA credit-quality," said S&P analyst Cora Bruemmer.
The $52.3 billion budget package won bipartisan support on the last day of the fiscal biennium June 30, a task not always seen given divided leadership and past battles over spending, bonding, taxes, and Gov. Tim Walz’s emergency COVID-19 powers.
Walz is a member of the Democratic-Farmer-Labor Party which controls the House and the GOP holds a Senate majority.
The budget anticipates $2 billion in spending that exceeds revenues, which is covered with $633 million of the state’s share of American Rescue Plan Act funds, $591 million of reserves, and $985 million from the balance being carried forward from the previous biennium. Rosier revenue projections make it likely that later this year the state’s reserve will return to its past level of $2.4 billion.
The budget provides a one-time tax cut of $595 million, $205 million in one-time transportation related spending, and $178 million for economic development. The state received $2.2 billion from the March 2020 CARES Act package and is in line for another $2.6 billion in direct aid from the ARP Act signed last March.
The state has earmarked all but $1.15 billion of the ARP funds, putting them toward various services, education, and other programs. Lawmakers will devise a plan for spending the remainder during the 2022 session.
“Minnesota’s improved outlook and AAA ratings show our state’s enduring strength. Even after a tough year, investors can have confidence in the state’s fundamentals, including balanced economy, strong management, and commitment to progress that achieved a bipartisan budget compromise,” said Jim Schowalter, commissioner of Minnesota Management and Budget.
Proceeds of the sale will pay for projects included in the state’s bonding bill packages that covers state and university facilities, pollution control, transportation, natural resources, and other projects. The state typically passes a small bonding package alongside its operating plan in odd years with even year sessions focused on a larger bonding bill.
This year, lawmakers didn’t take up a formal bonding bill but last year approved a record $1.9 billion infrastructure bill after a six-month delay as its consideration was tied up in a GOP battle with Walz over his pandemic emergency powers.
The state budget office has already received requests from its own agencies and local governments for more than $5 billion in spending when the 2022 package is compiled. Lawmakers and the governor typically whittle the amount down and the governor proposes his own list and sends it to the legislature in January. The House and Senate GOP and Democratic factions also produce their own versions.
The 2020 batch of projects relies on nearly $1.4 billion of general obligation borrowing with additional GO-backed trunk highway and appropriation-backed bonding and cash financing the remainder. The legislation also extended the state’s ability to use negotiated sales on bond deals. The borrowing level exceeded the previous high of $1.1 billion in 2014.
The state typically borrows in late summer or early fall. The state achieved
S&P had
Updated revenue forecasts published in early December and March that guide the budget process first eased and then erased the gaps. The March forecast erased all red ink and projected a $1.57 billion surplus.
Since the March forecast, state revenues have outpaced estimates due to a robust economic recovery and preliminary fiscal 2021 year-end estimates put total general fund revenues at a healthy $2.68 billion over March’s projection.
The state holds $1.8 billion, or 3.5% of biennial revenues, in a rainy day fund with another $350 million available in a cash-flow account and $136 million in a special stadium reserve. The state will replenish the rainy day fund to nearly $2.4 billion with future surpluses.
The state’s healthy reserves cushioned the rating heading into the pandemic, Fitch said.
“Fitch believes the state materially enhanced its reserve funding practices during the last economic recovery, making revenue volatility the focus of an updated budget reserve policy that introduced automatic funding mechanisms to grow reserves,” Fitch said. “The state's reserve target is now sized to provide a 95% level of confidence that a biennial deficit will not exceed budget reserves.”
The cushion also girded against analyst worries over divided state leadership that in the past had led to state shutdowns and one-time maneuvers to solve gaps.
“Negotiations for the last four biennia, including the current 2022-2023 biennium, were characterized by high levels of tension despite solid revenue growth and substantial projected ending balances,” Fitch said. “Given the availability of higher reserve balances than have historically been the norm, Fitch believes it unlikely that Minnesota will resort to the extraordinary measures it has taken in the past.”
Moody’s also noted the state’s success in putting aside political differences.
“Despite a history of politically fraught budget negotiations, which have included government shutdowns, the state has now passed two biennial budgets without major challenges, and the fiscal 2022/23 budget is largely balanced net of one-time expenditures and one-time pandemic-related tax exemptions,” Moody’s said.
The state has $6.1 billion of GO debt and $807 million of appropriation-supported bonds.
The outlook revisions trickle down to other credits backed by the state such as the enhancement programs for school debt and cities and counties. S&P rates the enhancement programs at the same level as the state and Moody’s rates them one notch lower.
In tandem with the state offering, Moody’s assigned Aa2 ratings to the Minnesota Housing Finance Agency's upcoming sale of about $75 million state backed appropriation bonds and Aa2 to the Regents of the University of Minnesota’s $130 million new money and refunding deal to help pay for a biomedical research facility. Both outlooks are also now positive.
Public Resources Advisory Group Inc. is advising the state on this week's sales and Kutak Rock LLP is bond counsel.
