Thursday, August 13, 2009

How do we rate? 

Bully for Minnesota: It continues to have the highest debt rating:
In conjunction with a proposed $600 million General Obligation (GO) bond sale on August 11, the three major bond rating agencies have affirmed Minnesota�s existing credit ratings. The bonds continue to receive the highest ratings - AAA - from Standard & Poor�s Corporation and Fitch Ratings. Moody�s Investors Service maintained their rating of Aa1.

Fitch Ratings summarized its decision for the high rating: �Minnesota's 'AAA' GO rating reflects the state's excellent debt structure, broad-based economy with above-average wealth levels, and track record of management that is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts.�

Each agency did caution that the economic downturn and its effect on the state budget continues to be of concern.

�Nearly all states are facing difficult times in this recession, but there is underlying strength in Minnesota�s economy and we are maintaining our tradition of strong financial management,� said Minnesota Management and Budget Commissioner Tom Hanson. �We still have work to do but appreciate being recognized as one of the highest rated states.�
Those bond sales resulted in raising $272 million for various government projects at 3.4% interest, and saving $30.3 million by refinancing some older debt. Looking at a yield curve for Minnesota muni bonds shows we pay lower interest rates than the national average.

There are approximately $4.7 billion in Minnesota state bonds outstanding. There is about a 35 basis point difference in rates paid on AA and AAA rated munis. I make that then as about a $17 million per year savings on our debt from maintaining the high rating.

The obvious question is whether or not the rating could have been maintained if we had borrowed more, or if we had decided to raise taxes, rather than go through the current battle over the budget. If we had fallen to a single-A rating, say, like Illinois did a couple weeks ago, you're paying an extra 125 basis points, or another $58.7 million, every year.

How do you get a AAA rating? By being happy to pay more for a better Minnesota? Or by keeping taxes low? The argument continues...

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