TEXT - Fitch rates Minneapolis, Minn. GOs 'AAA'
Nov 6 - Fitch Ratings assigns an 'AAA' rating to the following Minneapolis, MN (the city) bonds: --$5.535 million general obligation (GO) improvement bonds, series 2012. Proceeds will be used to pay for various capital projects. The bonds are scheduled for competitive sale on Nov. 13. In addition, Fitch affirms approximately $762 million of the city's outstanding GO bonds at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are secured by the city's unlimited full faith and credit pledge. KEY RATING DRIVERS STRONG FINANCIAL FUNDAMENTALS: The city benefits from conservative financial management resulting in stable financial performance and healthy reserve levels despite rising employee expenditures and cuts in state aid. PROACTIVE, CONSERVATIVE MANAGEMENT: Management has prudently dealt with potential budgetary challenges, including showing a willingness to increase property taxes as needed. MODERATE DEBT BURDEN: Debt levels are average and rapidly declining and the city's future capital needs remain manageable; amortization is above average. ECONOMIC DIVERSITY: The broad and diverse economy continues to show resilience. CREDIT PROFILE DIVERSE EMPLOYMENT BASE STABILIZES ECONOMY Minneapolis' diverse and broad economic base has shown resilience during the ongoing recessionary environment. The employment base benefits from the strong presence of health care, financial institutions, higher education, and government, all of which have helped stabilize unemployment rates. The city's employment base is strong and has recently shown signs of growth; the August 2012 unemployment rate was 6.0%, above the state's low rate of 5.6% but well below the national rate of 8.2%. The unemployment rate is well below the 6.7% rate in August 2011. While the city experienced solid tax base growth for many years, its taxable value has been down for the last four years, reflecting declines in housing prices and the resolution of foreclosures. The commercial tax base is supported by a diverse group of businesses and is home to numerous corporate headquarters including Target and US Bank. Vacancy rates in Class A office space fell to 13% by year-end 2011 from 15.5% a year earlier. After a period of declines, residential sale prices are also up over recent highs. The city is home to a number of new development projects. In conjunction with the state and the team, the city recently agreed to terms on a new replacement stadium for the NFL's Minnesota Vikings. The city's share of stadium construction and operating costs will be paid through the extension of local sales taxes currently used to pay for convention center debt and operating costs. The state will cover the city's share of costs through 2020, when the convention center debt is fully amortized, at which point the state will retain a portion of the local sales taxes to cover the city's share of stadium construction, operations, and capital reserves. Based on preliminary projections, the local sales taxes should adequately cover the city's share of costs. FUND BALANCE REMAINS HIGH DESPITE CUTS IN STATE AID The city maintains a policy of keeping its fund balance at 15% of revenues. The city has been able to maintain its strong reserve levels despite significant variance in Local Government Aid (LGA) receipts from the state beginning in 2008. The general fund, supported largely by state aid and property taxes, has produced generally consistent operating surpluses. However, 2010 results produced a $6.9 million reduction in fund balance, bringing the unreserved fund balance to $60.1 million, or a still-solid 16.0% of the expenditures and transfers out. State reductions in LGA in 2010 totaled close to $32 million but the city made expenditure reductions to offset most of the cut, including the elimination of positions through attrition, early retirement, and layoffs. The 2011 budget included a 4.7% property tax levy increase, eliminated an additional 80 positions, and included a 6% increase in expenditures reflecting additional pension costs. While the state certified an increase of $23.4 million in LGA from 2010 levels, management conservatively developed an alternative budget with specific expenditure reductions in the event the additional aid was not received. As expected, the state budget approved in July 2011 eliminated the LGA increase, and the city's budget cuts were enacted. Despite these cuts in aid, the city finished 2011 with an $11 million increase in fund balance in its general fund, ending the year with an unrestricted fund balance (the sum of committed, assigned and unassigned as per GASB 54) of $72.3 million or a healthy 19.5%. The 2012 budget is balanced with no increase in the property tax levy from 2011. State aid is expected to remain flat at $64.1 million. The city will begin reducing general fund transfers to internal service funds as the need has diminished. After a history of negative fund balances in several of these funds, the final internal service fund should shift to a positive fund balance in 2012. The city anticipates prepaying $50 million of pension obligation bonds on Dec. 1, 2012 using funds accumulated for this purpose, reducing future debt costs. The city currently expects to finish 2012 with a small increase in fund balance. The 2013 Mayor's recommended budget is balanced and includes a 1.8% increase in the property tax levy from 2012. State aid is expected to remain flat. Fitch believes the city can make additional cuts or use fund balance to offset potential cuts in aid during the state budgetary process. The budget includes the addition of six employees after several years of staffing cuts. ADEQUATE PENSION FUNDING AIDED BY PLAN MERGERS The merger of the city's closed police and fire pension funds into the state's pension plan has significantly reduced the city's near-term pension costs for these funds. Relief results from less conservative actuarial assumptions, which reduce the city's 2012 contributions to these two plans from $23.1 million to $2.6 million. This offsets a $13 million increase in the contribution to the Minneapolis Employee's Retirement Fund (MERF), another closed fund that is now part of the state plan. Fitch notes that the near-term relief will result in potentially higher future payments. Total pension payments are about 13% of general fund expenditures and transfers out in 2012, similar to their level in 2011, and will increase to about 15% in 2013. Using a 7% rate of return assumption, funding in the plans ranges from adequate to strong. The city's unfunded actuarial accrued liability (UAAL) for other post-employment benefits (OPEB) is minimal as it represents only an implicit rate subsidy. DECREASING DEBT BURDEN The city's overall debt burden is at the low end of the moderate range at $2,354 per capita and 2.5% of market property value. Principal amortization is rapid with 81% maturing in 10 years; future capital needs are manageable. The city's general obligation debt at the end of 2012 will be 30% lower than in 2008 as a result of pre-payments, rapid amortization, and reduced issuance.