Getting Back to the Best

When Governor Arne Carlson arrived home one evening in 1996, a congratulatory bottle of champagne awaited him. A staff member had given it to Carlson to help him celebrate the fact that Moody’s Investors Service had upgraded Minnesota to triple-A—the highest bond rating. About a year later, Standard & Poor’s would follow suit. Fitch Ratings had already done so, in 1993. Indeed, Carlson now regards returning Minnesota to the exclusive fraternity of states with top credit ratings from each of the nation’s three principal bond-rating agencies as one of his most auspicious achievements during his eight years as governor.

But these days, Minnesota is once again absent from the list of states with top ratings from all three agencies. While the state has hung onto its triple-As from Standard & Poor’s and Fitch, Moody’s knocked Minnesota down a notch in 2003. Today, only Delaware, Georgia, Maryland, Missouri, North Carolina, Utah, and Virginia are rated triple-A by all three agencies.

Although part of the allure of having three triple-A ratings is simply to be a part of an elite, high-performing group of states, there are tangible benefits to having the top ratings: lower interest rates on Minnesota’s bonds would free up money to be invested elsewhere.

When a state loses a triple-A, “it means the state isn’t as good as the best,” says Jay Kiedrowski, who worked for Governor Rudy Perpich in the mid-1980s as the state’s finance commissioner. “I was concerned when Minnesota lost its triple-A from Moody’s in 2003. That hurt.”

“It’s easy to lose the triple-A rating, but it’s hard to get it back,” says John Gunyou, finance commissioner during part of the Carlson era. History speaks to Gunyou’s point. It took 16 years for Minnesota to get back a triple-A rating from Standard & Poor’s after analysts there downgraded the state in 1981—and 14 years to regain the Moody’s triple-A after that agency dropped it in 1982.

Does having all three triple-As really make a difference? “We are trading as a triple-A despite losing one of the three triple-A ratings,” says Peter Sausen, who retired this spring from his post as assistant commissioner of the treasury division at the state Department of Finance, but continues as a consultant there. He notes that when Minnesota went to the market with a $460 million bond issue in mid-2003, five weeks after the downgrade from Moody’s, the state got an interest rate similar to the prevailing rates for bonds with three triple-A ratings. Sausen also points to a finance department study suggesting that since 2003, the state has actually gotten marginally better interest rates than the indexed rates for triple-A rated bonds.

But Kiedrowski rejects that study’s conclusion, saying it’s impossible to know what interest rate the bonds would have fetched if they had been rated triple-A by all three agencies. In theory, he says, it’s “almost obvious” that a state rated triple-A across the board would win a lower interest rate on its bonds than a state which, like Minnesota, has only two of the top three ratings. In any event, the department lists as a goal regaining the Moody’s triple-A rating.

Getting back the third triple-A would provide distinct advantages for Minnesota: conceivably, better interest rates and the opportunity to promote more aggressively its strong financial position and fiscal responsibility. The interest rate differential between a Moody’s double-A1 and a triple-A may be hard to define, but there's nothing understated about the state hitting its own benchmark for financial performance and reaping the promotional benefits that status bestows.