Minnesota's finance officials monitored the situation closely as stocks across the globe declined on the first day of trading after Standard & Poor's downgraded the nation's debt credit rating.
Chief concern is whether the stock sell-off and credit downturn affects the state's bottom line. The stock market's downturn doesn't necessarily mean the economy is at risk, but it's a clear signal that investors are worried.
The biggest ramification of a slowdown would be to the state's budget situation, the likelihood being fewer tax dollars flowing into the state's treasury.
Minnesota Management and Budget Commissioner Jim Schowalter said the market downturn and concerns about a double-dip recession may mean Gov. Mark Dayton and state lawmakers could face another budget deficit when the 2012 legislative session begins in January.
"Balancing the budget once, unfortunately, doesn't guarantee that it will be balanced for the entire biennium," Schowalter said. "When big things like this happen, it will have ripple effects throughout our economy."
Minnesota is scheduled to borrow $700 million to help balance the current budget. That money is leveraged by future tobacco payments. State officials also plan to borrow $500 million to fund public works projects.
The Standard & Poor's decision to downgrade U.S. debt follows two negative reports about Minnesota's credit rating, Schowalter said. He said the state likely would be forced to pay more to borrow.
Even a slight uptick in interest rates would still leave them low compared to historic standards. However, the higher borrowing costs will come at a time when nearly every unit of government in Minnesota is forced to deal with budget shortfalls.
Shawn Gillen, an administrator with the city of Grand Rapids, said he's not worried about borrowing in the near future. He is concerned of what an economic slowdown or recession could do to the city, especially if it results in further cuts in local government aid.
"There are a lot of people speculating about what's going to happen, but the reality is nobody knows," Gillen said. "This has never happened before. I'm just keeping my eye on it and making sure we're prepared for any contingency."
The state of Minnesota has cut aid to cities over the past several years to help balance the state's budget. Further cuts could create another cash crunch for cities and counties.
School districts statewide have begun to borrow to meet short-term needs — moves made necessary after the governor and Legislature opted to defer $700 million in payments to schools. Those deferments come on top of deferments of nearly $2 billion from the last budget cycle.
Higher borrowing rates aren't good for Minnesota schools, state Education Commissioner Brenda Cassellius said.
"If the interest rates go up, certainly it could mean higher interest rates for schools," Cassellius said. "And our state got downgraded, too. So, it's just not a good path to be going down. We need to be responsible; we need to have a balanced approach, and we need to mix our cuts with revenues."
State and local officials also keep a close eye on where President Obama and Congress look to cut to lower the federal deficit. Those cuts could hit housing, health care and other state services.
A bright spot is that federal budget cuts won't sting as much in Minnesota as other states, said Michael Brilley, president of Sit Investments, an asset management firm in Minneapolis.
"Minnesota is a net payer, meaning Minnesotans have more money going to Washington than coming back," Brilley said. "It doesn't mean that there won't be an impact. It just means that we're less reliant than federal monies than most states."
Another immediate area of concern due to the economic turmoil will be the state's pension funds.
Minnesota invests pension fund money in the stock market to help fund retirement benefits. Today's selloff means those investments may have taken a hit.
Calls about the matter to the executive director of the State Board of Investment were not returned in time for this report.
MPR News reporters Tim Nelson, Tom Weber and Jennifer Vogel contributed to this report.