Fitch explains state rating framework, reiterates Minnesota AAA stable

Eric Kim, an analyst at Fitch Ratings, told the Senate Capital Investment Committee on March 4 that Fitch maintains an issuer default rating of AAA with a stable outlook for the state of Minnesota and outlined how the agency reaches that view.

Kim said that "a rating is fundamentally Fitch's opinion on the likelihood and willingness of a borrower to repay its debts," and walked senators through Fitch's rating process, published criteria and several supporting reports Fitch provided to the committee. He described the AAA assessment for Minnesota as the result of high assessments on three of Fitch's key rating drivers and generally stable operating performance.

Fitch defines four principal rating drivers it reviews for states: the economic resource base, revenue framework, expenditure framework and long-term liability burden. For Minnesota, Kim said Fitch assigns AAA assessments to the state's revenue framework, expenditure framework and long-term liability burden. He said Minnesota's carrying costs — the portion of annual spending for debt service, pensions and other post-employment benefits — are "low relative to the U.S. median and well below 10%," a threshold Fitch uses in its guidance for AAA-level expenditure assessments. He also said Minnesota's long-term liabilities, measured as direct debt plus pension liabilities relative to personal income, are below the state median used in Fitch's annual liability report.

Kim described operating performance as the most important of the four rating drivers. He said Fitch uses a model called FAST (Fitch Analytical Stress Test) to simulate how state revenues perform in a downturn and to compare resilience across states. "This is not intended to be a forecast," Kim said of the scenario analysis; the slides show a modest national recession stress applied consistently across all states to estimate a possible revenue gap if expenditures are left unchanged. Kim emphasized that the scenario is an "unaddressed stress" to illustrate comparative sensitivity rather than to predict Minnesota's actual fiscal trajectory.

Senators asked follow-up questions about the scenario analysis and long-term liabilities. Senator Nelson expressed concern about a chart showing revenues and expenditures in the scenario analysis and whether the dotted projection implied a structural imbalance; Kim reiterated the slide represents a stress scenario, not Fitch's forecast, and that the purpose is to apply a consistent stress across states. Senator Pappas asked whether amortization (debt paid off within set periods) is an important part of Fitch's assessment; Kim said amortization is not critical for state ratings but that Fitch considers carrying costs and the liabilities-to-personal-income metric more central. Senator Pratt asked about the carrying-cost threshold and whether it includes pensions and OPEB; Kim confirmed the carrying-cost measure combines debt service, pensions and OPEB.

Kim also noted Fitch's published reports and criteria provided to the committee, including a state criteria document and a 2024 report on long-term state liabilities that compare each state's burden to national medians. He said Fitch publicly rates 43 U.S. states and that most state issuer default ratings have been stable in recent years.

The committee did not take action on the rating presentation. Kim concluded by taking questions from senators; the committee thanked him and moved on to the next agenda item.