Minneapolis gets AAA-OK from bond-rating agency

Minneapolis’s foreclosure problem is well-known, but the Fitch bond-rating agency saw plenty of positive news Friday.

Approximately $50 million of new city debt was rated AAA, and Fitch reaffirmed that top rating for $1.2 billion in existing municipal obligations.

Despite reduced state aid and more cops spending, Fitch praises the city for steadily paying off what amounted to an internal credit card charged up during the ’90s.

The ratings agency notes the economic slowdown, but says Minneapolis has built up “increased flexibility … sufficient to withstand these pressures.”

The bond-rating success has been hard-won: to improve its balance sheet, City Hall has had to resist pressures to spend even more on public safety and public works. The city’s recent pothole epidemic — which one city official blamed on budget-related deferred maintenance — is one visible symbol of choosing belt-tightening over debt-ballooning.

Fitch’s release contains these economic nuggets:

• Although Minneapolis’s unemployment rate is rising, at 4.3 percent it’s a full percentage point lower than the state’s 5.4 percent rate.

• The foreclosure rate is “in line with other parts of the country” and the city should remain “financially sound and economically vibrant.”

• That late-’90s credit card should be paid off by 2017.

• Inconsistent state aid, higher policing costs, and a “vulnerable” 8-percent annual property tax-hike policy are all dangers. (Indeed, such hikes would be above the caps being hashed out this weekend at the State Capitol.)

Fitch also likes the city’s “aggressive” program to tackle foreclosure problems. However, it’s worth remembering that bond rating agencies have been under attack for too-sunny ratings that helped foment that crisis in the first place.

Here’s the full release:

Fitch Ratings has assigned an “AAA” rating to the City of Minneapolis, Minnesota’s (the city) following series 2008 general obligation (GO) bonds:

• Approximately $11,605,000 GO library bonds;

• Approximately $38,810,000 GO various purpose bonds.

The bonds will sell competitively on May 20, 2008. The city pledges its full faith and credit and unlimited ad valorem taxes in repaying the bonds.

In addition, Fitch affirms the rating on $1.2 billion of outstanding GO debt at ‘AAA’. The Rating Outlook is Stable. The city’s “AAA” rating reflects its broad economy with limited volatility, strong and consistent financial performance, ample financial flexibility, careful long-term planning, and moderate tax-supported debt levels.

Although declining state aid combined with growing public safety expenditures will likely continue to present budget challenges, Fitch believes the increased flexibility that officials have built up will be sufficient to withstand these pressures. Steady progress in managing the city’s internal service funds and legislative changes to the city’s funding requirements for one of its closed pension funds have improved the city’s financial outlook.

City unemployment equaled 4.3% in March 2008, up from 3.9% in March 2007. The magnitude of increase is consistent with Hennepin County’s and Minnesota’s — the state’s rate increased to 5.4% from 5% during the same period.

The city reports a sizable increase in foreclosures in the last two years but that it has in place an aggressive program to counteract the impact of foreclosures on homeowners and neighborhoods that includes prevention, property acquisition, and counseling.

A weakened housing market is also evidenced by a decline in building permits and a 6% drop in residential market values in 2008. Total market value is down 2.7%. Fitch believes the slowdown is in line with that experienced in other parts of the country and expects the city will remain financially sound and economically vibrant.

The general fund has produced consistent general fund operating surpluses. Unaudited results for 2007 indicate about break-even general fund results, yielding an unreserved balance close to the city’s policy of 15% of the following years’ budgeted revenues. Both revenues and expenditures were close to 2006 levels.

General fund results would have been more positive, but a portion of 2007 operating surplus went towards an ongoing effort to reduce internal service fund deficits. Fitch believes completion of this effort by 2017, in addition to a merger of the city’s library’s with the county’s, will generate additional financial flexibility that the city may need to tap to support expenditure increases or revenue declines.

Fitch believes public safety needs will continue to increase, state aid will continue to be volatile, and the city’s policy of increasing the property tax levy by 8% annually may be vulnerable if values continue to decline or grow slowly.

The direct tax-supported debt burden represents $1,890 per capita and 1.8% of estimated market property value. Including debt of the Minneapolis public schools and other overlapping governments, overall net tax-supported debt of $1.3 billion equals $3,549 per capita and 3.4% of estimated market property value.

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