Rating Update: MOODY'S REVISES STATE OF MINNESOTA'S OUTLOOK TO NEGATIVE FROM STABLE AND AFFIRMS Aa1 GENERAL OBLIGATION

RATING Global Credit Research - 01 Aug 2011

OUTLOOK APPLIES TO APPROXIMATELY $6.1 BILLION IN OUTSTANDING DEBT

State MN

Opinion
NEW YORK, Aug 1, 2011 -- Moody's has revised the outlook on the State of Minnesota's general obligation bonds and state supported debt to negative from stable. Additionally, Moody's has affirmed the state's Aa1 general obligation rating, and the Aa2 rating assigned to state supported debt, which includes the Minnesota Credit Enhancement Program (for school districts and localities), and various state supported appropriation debt. RATINGS RATIONALE The negative outlook primarily reflects the growing negative GAAP 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 2012-2013 biennium, and the likelihood of future structural budget gaps as a result of the use of the one-time budget measures. These negative factors put the state in a weaker position relative to other states within the same rating category. Credit Strengths: * Strong economic fundamentals, including relatively diverse employment mix and high wealth * Quarterly consensus forecasting incorporating multi-year revenue and expenditure projections * Executive authority to enact mid-year expenditure reductions * Debt ratios on a per capita basis and personal income basis which are relatively low * Relatively well funded pension system Credit Challenges: * Strained state finances which have led to a negative undesignated unreserved GAAP fund balance (UUFB) * Significant use of nonrecurring actions in the prior budget biennium and the current biennial budget * Reduction of budgetary reserves which reduces flexibility to address unexpected revenue shortfalls * Emerging trend of political intractability resulting in late budgets and government shutdowns DETAILED CREDIT DISCUSSION FISCAL 2012-2013 BIENNIUM BUDGET BALANCED WITH USE OF NON-RECURRING MEASURES In planning for the 2012-2013 biennium budget, Minnesota faced a budget gap of $5 billion, roughly 15% of projected spending for the 2012-2013 biennium. The budget gap was brought on by significant past use of nonrecurring solutions, such as the payment delays and fund sweeps used to balance the 2010-2011 biennium. The enacted budget, assumes spending of $35.9 billion over the two year budget period. The state did not implement any new permanent revenues, instead relying largely on non-recurring measures to solve the $5 billion budget gap. The non-recurring measures account for 54% of the budget solution while spending reductions make up the remaining 46%. The state will realize $2.1 billion in savings by shifting school aid payments into the next budget year, $640 million from a tobacco securitization, $700 million in reduced funding levels aid to local governments (LGA), $350 million from higher education funding reductions, and the remainder in overall state agency spending reductions. In addition to reduced funding levels, local governments will experience delays in aid. School districts will receive a state aid shift to 60%/40% from a 70%/30% which will help with the state's financial operations. Minnesota has incorporated non-recurring measures to fix budget shortfalls since fiscal 2009, when the economic downturn reached the state. Each subsequent fiscal year the state continued to increase the use of one-time measures for a quick fix, creating a structural budget imbalance in future years. According to the executive budget proposal released in February of the 2011 legislative session, if the 2012-2013 biennium budget failed to incorporate significant recurring measures to balance the budget, the state would face another $4 billion budget shortfall in the 2014-2015 biennium. Although this was an early projection, the state will face significant obstacles in achieving structural budget balance in the next budget cycle as a result of the nonrecurring actions taken to date. RECENT GOVERNMENT SHUTDOWN LONGEST IN STATE HISTORY During the 2011 legislative session Gov. Mark Dayton's original executive budget recommendation included new taxes forecast to generate approximately $3 billion of new recurring revenues. Disagreement over the new taxes resulted in a budget impasse, with the state legislature staunchly against any additional taxes. The state failed to enact a new biennium budget in time for the new fiscal year which began on July 1,

effecting an immediate shutdown of government operations pursuant to statute which prohibits the state from spending without a legislatively approved budget. The protracted government shutdown marked the longest shutdown in the state's history ending after 20 days. The state previously shutdown government operations in 2005 for 8 days. While some states may go through a late budget process, the situation is more severe in a state like Minnesota which lacks any formal contingency plans to continue government operations during a late budget. PREVIOUSLY AT RECORD HIGHS, RESERVES HAVE BEEN DEPLETED AND FUND BALANCE DRAWN DOWN As a result of weak revenue performance beginning in fiscal 2009, Minnesota depleted its budget reserve account to plug large budget gaps in fiscal 2009 and 2010. The state currently has a modest $275 (less than 1% of revenues) million in budget reserves available to use. Minnesota's 2010 audited financial statements show the state ended fiscal year 2010 with a negative unreserved, undesignated fund balance (UUFB) of $1.5 billion, which represent -10% of general fund revenues. This negative increased from fiscal 2009 negative balance of $746 million (5% of fiscal 2009 general fund revenues). These negatives represents a significant turnaround in state finances from fiscal 2007 when the available fund balance was slightly higher than $1 billion. STATE LIQUIDITY IS NOW POSITIVE During the prior 2010-2011 biennium, Minnesota's liquidity position was under pressure and the state's statutory general fund cash position had weakened considerably. The state implemented many short-term actions to conserve cash, such as delaying corporate and sales tax refunds up to 90 days, and also delaying a $52 million payment to the university system. Currently the state anticipates a positive ending cash position of $2.9 billion to end June 2011. Additionally the state has entered into a line of credit with US Bank for $600 million, which also bolsters its liquidity position. The state has not engaged in external short-term cash flow borrowing, the last time the state undertook this type of action was in 1985. It should be noted that in the event of additional liquidity pressures, payments of debt service will not be affected; Minnesota is constitutionally required to set aside 18 months' of debt service payments every December 1st. MINNESOTA BENEFITS FROM BROAD ECONOMIC DIVERSITY The state has a fundamentally strong economy; it is not dependent on any one sector which can lead to economic weakness beyond that experienced by the country as a whole. Employment is diverse, with a mix of manufacturing, services, and trade similar to the nation. Personal income per capita (PCPI) is consistently above the U.S. average; for the past five years the state's PCPI has been between 105% and 109% of the national average. While the state has historically lagged the nation in unemployment, the rate rapidly grew to mirror the nation in the first quarter of 2009. Since then, the state unemployment rate has fallen below the national rate. The Minnesota unemployment rate for June 2011 was 6.6%, below the national rate of 9.2% during the same period. STRONG DEBT MANAGEMENT AND BELOW-AVERAGE DEBT LEVELS Minnesota's debt levels have historically been a neutral-to-positive part of the state's credit profile. The state's debt issuance is highly centralized, with the bulk of bonds issued carrying the full faith and credit pledge of the state. Minnesota's metrics have tended to place the state about average or slightly better among the states for debt issuance. Moody's 2011 State Debt Medians Report shows that Minnesota ranks 23rd in debt per capita and 28th in debt as a percent of personal income, largely a result of the state's increasing personal income levels. Minnesota also benefits from well funded pension ratios and a relatively low OPEB liability. The state reported a pension funding level of 84% as of June 30, 2010 and an OPEB liability of $755 million with an annual required contribution equivalent to 0.4% of annual revenues. During the 2010 legislative session the state enacted pension modifications, increasing employee contributions and reducing pension benefits. The modifications are expected to save the pension system $2 billion over the next five years. The state also recently benefited from a recent court ruling which allows the pension system to reduce or suspend the cost of living increase allowances for current retirees until the pension system is 90% funded.

Outlook
The rating outlook for the state is negative. Minnesota continues to deal with the outcome of the fiscal stress placed on the state during the recession. The measures taken by the state thus far are not of a recurring nature and available reserves have been substantially depleted. This leaves the state facing the challenge of addressing ongoing structural imbalance with limited resources in an uncertain economic environment. What could change the rating--UP? * Sustained trend of structural budget balance * Restoration and maintenance of healthy reserves and general fund balance. What could change the rating--DOWN? * Continued reliance on one-time solutions to solve recurring budget shortfalls * Continued political intractability which prohibits the state from making budgetary decisions * A fundamental negative change in the state's economy compared to the nation * Significantly strained liquidity * Multiple years of negative GAAP fund balances The principal methodology used in this rating was Moody's State Rating Methodology published in November 2004. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. Information sources used to prepare the rating are the following: parties involved in the ratings, public information. Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating. Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history. The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information. Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts
Kimberly Lyons Analyst Public Finance Group Moody's Investors Service Emily Raimes Backup Analyst Public Finance Group Moody's Investors Service

Contacts
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