Minnesota loses AAA rating on Fitch downgrade

Rest areas along I-35 in southern Minneosta are closed due to the state government shutting down on Friday going into the July 4 holiday after Democratic Governor Mark Dayton and Republican legislative leaders failed to reach a budget deal in St. Paul, Minnesota Friday July 1, 2011.

NEW YORK (Reuters) - Minnesota lost its top credit rating on Thursday as Fitch Ratings downgraded the state's general obligation bonds one notch to AA-plus, citing the budget impasse.

Minnesota's state government has been shut since last Friday, when Democratic Governor Mark Dayton and the Republican-led legislature missed the July 1 deadline for a budget. The governor's latest plan totals about $1.4 billion more than the GOP's $34.2 billion proposal.

The credit agency faulted Minnesota's use of so-called "one-shots", or nonrecurring revenues, to close deficits during the recession, a pattern it said likely will be repeated in the new budget.

Fitch also cited "an increasingly contentious budgeting environment" though it said the rating outlook was stable.

Almost all states have a July 1 deadline for their budgets, and despite the lingering damage to revenues inflicted by the recession, Minnesota is the only state that had to shutdown.

Minnesota has furloughed more than 20,000 of the 36,000 state employees, suspended the lottery and dozens of road construction projects, and closed state parks during their peak season.

Options for balancing the budget could include further delaying a $700 million payment to schools, Fitch said. While the governor might recommend an income tax hike for wealthy individuals, according to the credit agency, the legislature could prefer selling debt backed by payments cigarette-makers owe to help cover the health care costs of ailing smokers.

Fitch's downgrade affected about $5.7 billion general obligation bonds.

The credit rating agency also lowered the rating on the state's school district credit enhancement program, which is linked to the GO rating, to double-A from double-A-plus.

(Additional reporting by David Bailey in Minneapolis and Andy Greder in Pine City, Minnesota and Andrew Stern in Chicago)

(Reporting by Joan Gralla and Chip Barnett in New York)