Many policymakers are hoping for a quick bonding bill this session, wanting to take advantage of a favorable credit market to create jobs in Minnesota. However, at a legislative hearing on Monday morning, many were surprised to learn that an early bonding bill could have more implications than we were aware of. (Session Daily has written up a good summary of the discussion.)
It is standard practice that the state does not sell bonds until the legislative session is over. That’s because in order to issue bonds, Minnesota must first provide a statement that discloses the state’s fiscal situation. It’s a little difficult to give an accurate accounting of the state’s finances before policymakers have agreed on a budget and resolved the state’s deficit.
So, what happens if policymakers pass a bonding bill with plenty of “shovel-ready” projects early in the session? Those projects would probably need to be paid for out of the general fund until the state was ready to put the bonds up for sale after the legislative session ended (at which point the general fund would get paid back). Unfortunately, fronting bonding money will only contribute to the state’s significant spring cash flow problem. Keep in mind, however, that the state would only be advancing money for projects that were ready to go immediately, which is likely to be a small percentage of the total bonding bill.
There is no law preventing the state from issuing bonds during the legislative session. In fact, it was done in January 2009. However, Minnesota Management and Budget described that situation as “extraordinary.” So, while a quick bonding bill could be positive news for Minnesota’s economy, it could also exacerbate the state’s cash flow woes. (For more about bonding, take a look at a helpful information brief written by the House Research.)
-Christina Wessel
How often does the state’s credit rating get reviewed? Is our credit rating subject to change based on the above-mentioned disclosure of fiscal situation?
Could it be possible that the state would benefit from a quicker bond issuance, perhaps before a potential credit down-grading?
Thanks for any thoughts you have on these questions
I don’t believe there is a set schedule for when agencys review the credit rating. I believe they assess it as economic or fiscal conditions change. However, it is a timely question because Moody’s just announced yesterday that they have changed Minnesota’s outlook from stable to negative. But they did not actually downgrade the state’s rating – it stands at Aa1. I don’t think we necessarily face a downgrade in our credit rating as long as the state can demonstrate responsible fiscal management in the next few months. The key will be to pass a budget that not only resolves the $1.2 billion deficit for this biennium, but also makes a significant dent in our deficit for FY 2012-13. Legislators will also need to avoid one-time fixes.