Minnesota shutdown, impasse draws debt downgrade

MINNEAPOLIS Thu Jul 7, 2011 7:10pm EDT

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MINNEAPOLIS (Reuters) - Minnesota's government shutdown reached a seventh day on Thursday with no end in sight, and a major debt rating agency stripped the state of its AAA bond rating citing the budget battle as a reason.

Democratic Governor Mark Dayton and Republican legislative leaders met over the education budget and House Speaker Kurt Zellers and Senate Majority Leader Amy Koch called the governor's latest proposals "incredibly disappointing."

Minnesota state government has been shutdown since Friday, when the political adversaries failed to reach a budget deal to address a $5 billion deficit before the new fiscal year began.

The public positions by Minnesota's leaders have echoed differences in Washington and several other states. But Minnesota is the only state where the government shut down.

President Barack Obama's pronouncement on Thursday that nothing would be done until everything was done on a deal to raise the U.S. debt ceiling was very similar to Dayton's position on Minnesota state budget negotiations.

Before the shutdown began, Dayton and Republican leaders had imposed a "cone of silence" over budget details under negotiation. That has ended since talks resumed on Tuesday.

On Wednesday, Dayton released details of two options he proposed to close a roughly $1.4 billion gap between his budget proposal and the $34.2 billion plan Republicans have proposed.

Dayton offered proposals for either a temporary income tax increase on people making more than $1 million per year or a $1 per pack tobacco tax increase along with healthcare surcharges and a delay in school aid payments.

Republican leaders responded that a tax increase of any kind was off the table. Both sides also have acknowledged they have education and health policy differences to negotiate.

Fitch debt ratings agency mentioned the budget impasse as one reason for slashing the AAA bond rating, which is the highest rating possible.

"The context of budget decisionmaking has become increasingly contentious over time," the ratings agency said.

Minnesota Management and Budget Commissioner Jim Schowalter said the downgrade would increase state borrowing costs and indirectly impact interest rates for other public entities including cities, counties and schools.

"For years Minnesota has prided itself on having constructive, responsive public solutions but in the eyes of the marketplace, we are slipping," Schowalter said.

Also on Thursday, a bipartisan panel formed by former Vice President Walter Mondale and former Republican Governor Arne Carlson released an independent budget plan that much more closely resembled the governor's proposals than Republicans.

The panel recommended a budget of about $35.4 billion with a temporary 4 percent across the board income tax increase.

The proposal also included an alcohol tax increase, raising the cigarette tax by more than a $1 per pack to match Wisconsin's, adding a human services surcharge and delaying school aid payments.

Minnesota's government shutdown is much broader in scope than a nine-day impasse in 2005 under then-governor and now Republican presidential candidate Tim Pawlenty.

More than 20,000 of Minnesota's 36,000 state employees have been furloughed in the shutdown, leaving sparse staffing at several departments. Dozens of state funded road construction projects have been suspended as was the state lottery.

In the case of the state Department of Natural Resources, for example, state parks lose $1 million per week in revenue from visitors, and fishing license sales have been suspended, putting pressure on resorts and outfitters as well.

State parks, closed at night during the shutdown, also have reported mostly minor but widespread damage, from graffiti to broken locks and gates.

Prisons, state police patrols and nursing and veterans homes and other critical services have been maintained.

(Reporting by David Bailey in Minneapolis, Andy Greder in Pine City, Minnesota, and Andrew Stern in Chicago; Editing by Greg McCune and Diane Craft)

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