Fitch Rates Minneapolis, MN's $61.3MM GOs 'AAA'; Negative Outlook.

Business Editors

CHICAGO--(BUSINESS WIRE)--Dec. 3, 2002

Fitch Ratings has assigned an 'AAA' rating with a Negative Rating Outlook to the City of Minneapolis, Minnesota's $16,200,000 general obligation various purpose bonds, series 2002A; $9,500,000 general obligation library bonds, series 2002; $25,000,000 taxable general obligation pension bonds (MERF), Series 2002; and $10,600,000 taxable general obligation pension bonds (MPRA), series 2002. All four bond series will sell by competitive bid on December 11. Dated December 19, all four series pay interest each June 1 and December 1, beginning June 1, 2003. The various purpose bonds mature December 1, 2006-2028; the library bonds mature December 1, 2007-2025; the MERF pension bonds mature December 1, 2022-2026; and the MPRA pension bonds mature December 1, 2003-2014. The various purpose bonds are subject to redemption on or after December 1, 2010; the library bonds, the MERF bonds, and the MPRA bonds, December 1, 2012. The city pledges its full faith and credit and unlimited ad valorem taxes. The bonds will finance various municipal and library improvements; and meet liabilities in two municipal pension systems.

The 'AAA' rating reflects a broad economy having limited volatility, strong and consistent budgetary performance, ample financial flexibility and moderate tax-supported debt levels. The outlook is changed to Negative. Although the Minneapolis economy remains robust, state tax reform and increased funding demands for the internal service funds and pension funds have increased the city's financial risks. The city still retains significant flexibility in addressing financial issues, but the rising property tax burden will exacerbate budgetary management.

Recent retained earnings deficits in the city's internal service funds will require additional budgetary support and greater operating efficiencies to sustain the city's long-term rating. The self-insurance fund - particularly related to workers compensation and general liability - represents a significant share of the deficit and will require contribution rate adjustments to put the fund in good standing. Most of these funds have improved with financial results in 2001. Recent legislative changes have reduced the city's property tax capacity by 18.4% from two years earlier, but Fitch believes the city will compensate with increased tax rates to maintain existing levies. Lastly, recent increases in funding requirements for the city's two closed-end retirement funds will necessitate additional property tax support. The combination of early retirements in one fund (MERF) and diminished asset performance in another (MPRA) has increased unfunded pension obligations. To accommodate steadier increases in tax-supported funding over a moderately longer amortization period than mandated by the state, the city will issue taxable general obligation bonds this year. Assuming no improvement in pension fund performance, the city may need to issue additional pension bonds for several years, but other citywide capital needs are minimal.

The City of Minneapolis is a major regional financial, services, and trade center. Long-term growth has matched the state and nation as finance and other service industries outpaced durable manufacturing. Service industries represent the largest economic sector, followed by finance, insurance, and real estate and durable goods manufacturing. Durable goods manufacturing has experience limited growth recently, but remains a significant component of the local economy. Private investment growth has increased in both the downtown area and surrounding residential areas. In the last five years, citywide property values have increased 7.3% annually.

Although city employment in 2001 approximated 1990 levels, it declined in the early 1990s and rebounded since 1993. In the last year, employment grew 2.3% or well-above the 0.3% average growth since 1990. The city labor force expanded 1.2% in the year through September 2002 and elevated the unemployment rate to 5.0%, compared with 4.5% in September 2001. Through the period, the city's unemployment rate remained consistently near state and national levels.

The city's general fund has produced surpluses in the last five fiscal years (ending 12/31). The general fund balance totaled $39.6 million at the end of fiscal 2001 (15.9% of expenditures), compared with $18.5 million in fiscal 1996 (9.0%). Including special revenue and debt service funds, governmental fund balances equaled $190.9 million (33.9%) in fiscal 2001, compared with $159.0 million (33.6%) in fiscal 1996. Although some revenue streams are off modestly from last year, results for 2002 are anticipated to be near break-even.

Accounting changes complicate comparisons to earlier fiscal periods, but baseline operating expenditures have grown modestly. As the city shifted the tax burden to consumers, from resident property owners, it reduced its reliance on property taxes and diversified its other local revenues. The budget has a number of discretionary expenditures - particularly in capital projects - which the administration could compress in periods of financial stress. Enterprise funds are well-managed and in good financial condition because of timely rate adjustments.

Including general obligation tax increment and special assessment debt, the city's direct tax-supported debt burden of $532.1 million represents $1,391 per capita and 2.4% of fair market property value. Including debt of the Minneapolis public schools and other overlapping governments, overall tax-supported debt of $1.2 billion equals $3,158 per capita and 5.5% of fair market property value.