Fitch Rts Minneapolis, Minnesota $4MM GO Improvement Bonds 'AAA'.

CHICAGO -- Fitch Ratings has assigned an 'AAA' rating to the City of Minneapolis, Minnesota's, $3,780,000 general obligation (GO) improvement bonds, series 2006. Fitch also affirms the long-term 'AAA' rating on $1.3 billion of outstanding GO debt. The Rating Outlook is Stable. The bonds will sell competitively on Nov. 8, with Springsted Inc. serving as financial advisor. The city pledges its full faith and credit and unlimited ad valorem taxes in repaying the bonds, which will finance street renovation and reconstruction.

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. Fitch expects that the city's general fund should produce a small surplus in fiscal 2006.

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 Ratings 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 $653.2 million represents $1,708 per capita and 1.8% of fair market property value. Including debt of the Minneapolis public schools and other overlapping governments, overall tax-supported debt of $1.3 billion equals $3,496 per capita and 3.7% of fair market property value.

The city has five pension plans, three of which are closed to new members. The Minneapolis Firefighters Relief Association (MFRA) and the Minneapolis Police Relief Association (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 have improved in 2005 (86.2% and 77.3%, respectively).

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