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MN Bond Rating Downgraded Due to Budget Standoff

Fitch Ratings lowered the rating on $5.7 billion in state general-obligation bonds to AA+ from the best AAA rating, citing "the difficulties in reaching consensus on a plan to address the resulting large budget gap for the biennium that began on July 1."

Fitch Ratings downgraded its rating on $5.7 billion in State of Minnesota general-obligation bonds to AA+ from the best AAA rating-citing the state budget impasse as a reason for the move.

The global rating agency said that the downgrade was due, in part, to "the difficulties in reaching consensus on a plan to address the resulting large budget gap for the biennium that began on July 1."

Governor Mark Dayton and the Republican-controlled Minnesota Legislature haven't been able to agree on a budget-and all non-essential state services have been shut down since July 1, the start of the fiscal year. Dayton's latest plan calls for a two-year budget that totals $1.4 billion more than a GOP-backed $34.2 billion proposal.

"While negotiations continue, it is impossible to know at this point when a budget agreement will be reached or the shape that the final agreement will take," Fitch said in a statement. "However, it appears likely that the outcome will continue the use of non-recurring balancing tools and that deferred payment obligations will continue to be a drag on the state's finances."

Fitch reaffirmed that "Minnesota's credit remains fundamentally strong," adding that the state has a history of rebuilding reserves and repaying deferrals to school districts following economic downturns. However, payment deferrals that the state relied upon in the most recent downturn were larger than those in the past and "the context of budget decision making has become increasingly contentious over time."

Fitch said that Minnesota's economy is balanced, adding that the state's unemployment rate-which climbed slightly in May to 6.6 percent-is well below the national rate of 9.1 percent. Additionally, personal income per capita is the 13th-highest among all states, totaling 106 percent of the U.S. average. The state's debt position is also strong, with a debt burden that's on the low end of the moderate range, and the state has conservative debt policies, the ratings agency said.

According to The Bond Buyer, which bills itself as "the daily newspaper of public finance," Minnesota has retained strong ratings from the other two major ratings agencies. Minnesota has retained its AAA rating from Standard & Poor's-and Moody's Investors Service rates it Aa1, the second-highest rating.

In addition to downgrading Minnesota's general-obligation bonds, Fitch also downgraded the rating of the state's school district credit enhancement program to AA from AA+.

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