Fitch Rts Minneapolis, MN's $36MM GOs 'AAA/F1+'; Outlook Revised to Stable.

CHICAGO -- Fitch assigns ratings of 'AAA/F1+' to the City of Minneapolis, Minnesota's $31,715,000 general obligation (GO) various purpose bonds, series 2006, and $3,980,000 GO library bonds, series 2006. The long-term 'AAA' rating on both series of bonds is based on the GO rating that Fitch assigns to the city of Minneapolis and also applies to $1.3 billion of outstanding GO debt. The Rating Outlook is revised to Stable, from Negative, reflecting overall improvement in financial performance, an expectation of reduced debt issuance for pension obligations, and a stronger financial position of the city's internal service funds. The short-term 'F1+' rating on the bonds is based on the liquidity support provided by Dexia Credit Local, acting through its New York Branch, in the form of two separate standby bond purchase agreements (SBPAs). Fitch's short-term rating on the bonds will expire upon the earlier of: Dec. 1, 2013, the scheduled termination date of the SBPA with respect to the various purpose bonds, and Dec. 1, 2009, with respect to the library bonds, unless such dates are extended, or upon any prior termination of the SBPAs.

The SBPAs provide for the payment of the purchase price of tendered bonds during the weekly rate mode in the event that remarketing proceeds are insufficient following an optional or mandatory tender of the bonds. Each SBPA is sized to cover the principal amount of the bonds, as well as 92 days of interest calculated at 10%, based on a year of 365 days. The remarketing agent for both series of bonds is Wells Fargo Brokerage Services, LLC. The bonds are expected to be delivered on or about June 29, 2006. The proceeds of the various purpose bonds will be used to finance various projects of the city of Minneapolis, and the library bonds will be used to finance public library improvements, including the construction of a new central library and the construction of improvements to the community libraries.

Both series of bonds will be issued in the weekly rate mode, but may be converted to a daily or fixed rate of interest. While bonds bear interest in the weekly rate, interest is payable quarterly on March 1, June 1, Sept. 1, and Dec. 1, commencing Sept. 1, 2006. During the weekly rate mode, bondholders have the right to tender their bonds on any business day, following seven days' notice to the tender agent and the remarketing agent. Bonds are subject to a mandatory tender upon conversion to a fixed rate, upon the termination of the liquidity facilities, and on any substitution of the liquidity facilities that result in a reduction or withdrawal of the then current short-term rating. The bonds are also subject to mandatory sinking redemption and optional redemption pursuant to the terms of the Trust Indentures.

The long-term 'AAA' rating reflects a broad economy having limited volatility, strong and consistent budgetary performance, ample financial flexibility, and moderate tax-supported debt levels. 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. Steady progress in managing the city's internal service funds and possible legislative changes to the city's pension funding requirements have improved the city's financial outlook.

The city's general fund has produced surpluses in the eight fiscal years through 2004 (ending Dec. 31). Although the general fund in fiscal 2005 experienced a $7.8 million shortfall, the Mayor and City Council transferred $12 million to the Minneapolis Employee Retirement Fund to retire pension-related debt. The general fund ending balance totaled $53.6 million at the end of fiscal 2005 (17.5% of expenditures), compared with $18.5 million in fiscal 1996 (9.0%). To offset lost state revenue in 2003 and 2004, the city reduced close to 800 budgetary positions in April and May of 2003, while it made significant broad-based reductions in public safety and public works. As the local economy strengthened and tax revenues outpaced spending growth, the general fund withstood diminished state revenue sharing and increased public safety spending.

Accounting changes complicate comparisons to earlier fiscal periods, but baseline operating expenditures have grown modestly. As the city has shifted the tax burden to consumers from resident property owners, it reduced its reliance on property taxes and diversified 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.

Internal service funds, which carried a negative $34 million net asset position in 2003, now have a negative $21.9 million position in 2005 and continue to track their respective restructuring plans. Due mostly to the workers compensation and general liability claims in the self-insurance fund, the combined deficit has improved through workout plans for permanent improvement equipment services and intergovernmental services funds that include increased tax support, cost reductions, and modest debt restructuring. The city's self-insurance fund has benefited from reduced sick leave payments this year and contribution rate adjustments related to a new actuarial study of fund liabilities. Fitch anticipates that the city will continue using all available resources to eliminate the imbalances and restore the financial integrity of the internal funds.

Including GO tax increment and special assessment debt, the city's direct tax-supported debt burden of $679.4 million represents $1,777 per capita and 1.9% of fair market property value. Including debt of the Minneapolis public schools and other overlapping governments, overall tax-supported debt of $1.4 billion equals $3,565 per capita and 3.7% of fair market property value.

The city has six pension plans, three of which are closed to new members. The Minneapolis Firefighters Relief Association (MFRA) and MPRA only cover active and retired employees hired before June 15, 1980. Both the MFRA and MPRA experienced liability funding declines in 2003 (80.6% and 64.5%, respectively), but improved in 2005 (86.2% and 77.3%, respectively).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.