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.
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.
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
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
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.