Moody's revises Minnesota rating outlook to negative

CHICAGO (Reuters) - Moody's Investors Service on Monday revised the outlook on Minnesota's general obligation Aa1 rating to negative from stable, citing the state's widening structural deficit and political strife.

"The negative outlook primarily reflects the growing negative (generally accepted accounting principles) undesignated unreserved fund balance, political intractability that has resulted in the reliance on one-time measures to solve the $5 billion budget gap in the current fiscal 2012-13 biennium and the likelihood of future structural budget gaps as a result of the use of the one-time budget measures," Moody's said in a statement.

Minnesota's Republican-controlled legislature and Democratic governor used a series of one-shot measures and spending cuts to tackle the deficit and end a budget impasse that shuttered state government for nearly three weeks in July.

Moody's said the non-recurring measures, which included raising $640 million from the sale of tobacco bonds and shifting $2.1 billion in school aid payments into the next budget year, accounted for 54 percent of the budget solution.

The rating agency said the use of one-time measures stretches back to fiscal 2009, during the economic downturn. At that time, Tim Pawlenty, a Republican candidate for U.S. president, was governor and the legislature was dominated by Democrats.

Minnesota Management and Budget Commissioner Jim Schowalter warned on Monday the budget needs to be fixed "sooner or later" to stop the reliance on one-time measures.

"That continuing problem is particularly unfortunate because it obscures Minnesota's many strengths, including its general economy, strong forecasting process and conservative debt management practices," he said in a statement. "But until a structural budget balance is achieved, we cannot assume that Minnesota's financial condition is well above average."

Fitch Ratings in July stripped the state of its AAA rating, dropping it to AA-plus. Minnesota continues to be rated AAA by Standard & Poor's Ratings Services.

(Reporting by Karen Pierog, additional reporting by David Bailey in Minneapolis; editing by Dan Grebler)