ST. PAUL (AP) -- Minnesota dropped from the elite class of states with perfect credit ratings Monday when it was downgraded by one of three major Wall Street rating agencies, a change that will increase the cost of borrowing money.
Moody's Investors Service moved the state from Aaa to Aa1. Last week, the other major rating agencies -- Standard & Poors and Fitch Ratings -- upheld Minnesota's triple-A rating.
Minnesota had held the best rating from the three agencies since 1997; Moody's gave the state a triple-A rating in 1996. Analysts there were concerned about the deficit-erasing approach Minnesota lawmakers took this year and the state's budget outlook.
Gov. Tim Pawlenty said he expects the Moody's action to have only a "minor impact" on bonds sold for public works projects. In a news release, he predicted interest rates on state-issued debt probably would rise only a fraction of 1 percent.
"The fact that two of the three didn't downgrade us after this current budget crisis and the third agency downgraded us only slightly is evidence the decisions made this year were responsible, appropriate and mindful of the times in which we live," Pawlenty said.
The change didn't appear to have a noticeable impact when the state put $391.7 million in bonds up for sale Tuesday. Merrill Lynch & Co. outbid two other New York companies with an average interest rate of 2.1 percent -- far lower than Minnesota officials were expecting when they decided to refinance the bonds they issued a decade ago at interest rates in the 5 percent range.
"Whoa!" exclaimed Finance Commissioner Dan McElroy as the winning bid came in. "This was telling us that (Monday's) rating change didn't make a huge difference, at least for this sale."
Preliminary estimates were that Tuesday's transaction will save the state $50 million over the original amount due on the bonds. A $38.5 million chunk of that savings will arrive as part of a $430 million payment to the state next week.
Even so, the across-the-board top rating is a badge of fiscal pride now held by only seven states. Minnesota joins Michigan and North Carolina as states with the highest marks from two of the three bond agencies, McElroy said.
In explaining the decision, Moody's analysts said Minnesota leaders relied too heavily on accounting shifts and nonrecurring revenue to overcome a $4 billion-plus projected deficit.
About $1.8 billion of the problem was resolved through delayed payments to aid recipients and the one-time recapture of nearly $1 billion from endowments established with proceeds from the state's lawsuit against tobacco companies. No taxes were raised, though, and about $2.5 billion in spending commitments were permanently cut.
The analysts also were downcast about the state's empty rainy-day reserves, which won't be built back until next July. They expressed concern about future economic projections being overly optimistic.
And unlike peer top-rated states, the Moody's team noted, Minnesota waited longer to sufficiently address budget problems that first arose in 2002.
Tom Mallman, senior managing director of C.W. Henderson & Associates, a Chicago-based investment firm that specializes in municipal bonds, said the slight downtick shouldn't decrease appetite for Minnesota bonds.
Mallman said bond buyers consider double-A bonds solid.
"There might be a little bit feeling like your reputation has been tarnished," Mallman said. But, for buyers "it's not going to have a huge impact. We certainly wouldn't shy away from it. People pay their bills up there."
The last time Minnesota was downgraded -- in 1982 -- it took 15 years to climb back to the top rung. McElroy, Pawlenty's top budget adviser, said earning Moody's unflinching support again could take some time.
"It would be a surprise if we could get it back in less than few years," he said. "But we will start trying immediately and keep trying."
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