NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Minneapolis, MN (the city) general obligation (GO) bonds:
--$13.035 million GO improvement bonds, series 2013;
--$18.5 million GO library referendum refunding bonds, series 2013;
--$37.68 million GO various purpose bonds, series 2013;
--$1.285 million taxable GO housing improvement area bonds, series 2013;
--$7 million taxable GO various purpose park bonds, series 2013.
Proceeds will be used to pay for various capital projects and refund outstanding bonds. The bonds are scheduled for competitive sale on Nov. 19.
In addition, Fitch affirms approximately $732 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
ECONOMIC DIVERSITY: The broad and diverse economy continues to show resilience, and assessed value levels are projected to grow after several years of declines.
STRONG FINANCIAL FUNDAMENTALS: The city consistently exhibits stable financial performance and maintains healthy reserve levels that will allow it to absorb expected cost increases and a planned fund balance draw.
PROACTIVE, CONSERVATIVE MANAGEMENT: Management has prudently dealt with potential budgetary challenges, including a willingness to increase property taxes as needed and adherence to a reserve policy.
MODERATE DEBT BURDEN: Debt levels are average and rapidly declining and the city's future capital needs remain manageable; amortization is above average. Despite a planned increase in debt issuance in 2014, debt levels will remain well below historic levels.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
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 the relatively stable health care, financial institutions, higher education, and government sectors, which has helped stabilize unemployment rates. The city's employment base is strong and has recently shown signs of growth; the August 2013 unemployment rate was 5.1%, above the state's low rate of 4.8% but well below the national rate of 7.3%. The unemployment rate is well below the 5.9% rate in August 2012.
While the city experienced solid tax base growth for many years, its taxable value dropped for each of the five years through 2012, reflecting declines in housing prices and the resolution of foreclosures. Recently, the city has had a substantial amount of construction and home price appreciation, resulting in a small increase in taxable value for 2014 and a larger increase projected for 2015. The commercial tax base is supported by a diverse group of businesses and is home to numerous corporate headquarters including Target and US Bank.
FUND BALANCE GROWTH CONTINUES THROUGH 2013
The city maintains a prudent policy of keeping its fund balance at 15% of revenues. In addition, strong budget management has enabled the city to maintain 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.
Despite a $23.4 million mid-year cut in LGA, the city finished 2011 with an $11 million increase in fund balance, bringing its unrestricted fund balance to $72.3 million or a healthy 19.5% of expenditures. The city had prudently anticipated the cut by creating an alternative budget excluding the state funds, as well as raising the tax levy 4.7% and eliminating 80 positions.
The 2012 budget was balanced with no increase in the property tax levy from 2011, and state aid remaining flat. The city finished the year with a $14.1 million surplus, increasing its unrestricted fund balance to $86.3 million or 22.7% of expenditures. The surplus was a result of close expenditure management and license and permit revenues exceeding budget by $6.8 million due to strong construction activity. Furthermore, the city reversed a history of negative fund balances in several internal service funds by returning to positive balances in 2012. The city prudently prepaid $50.4 million of pension obligation bonds using funds accumulated for this purpose, reducing future debt costs.
2013 CONTINUES TREND OF POSITIVE RESULTS
The 2013 adopted budget was balanced and includes a 1.8% increase in the property tax levy from 2012. State aid is expected to remain flat. Projections through three quarters show the city with positive results on both revenue collection and expenditure control, with an expected $13.3 million increase in fund balance. Property tax revenue is well ahead of budget from better collections of delinquent taxes, and license and permit revenues are again ahead of budget from better than expected construction activity. Internal service and enterprise funds are also continuing to perform well.
CITY PLANS MANAGEABLE FUND BALANCE DRAW FOR 2014
After large surpluses in 2011, 2012 and anticipated for 2013, the city's preliminary 2014 budget includes a $9 million fund balance draw for 2014. Despite a $12 million increase in LGA, the budgeted draw results from a 1% decrease in the property tax levy, several approved one-time projects, and general fund transfers to internal service funds. Fitch believes that the city can easily manage the planned fund balance reduction given the financial flexibility generated by its recent surpluses. In addition, the internal service fund transfers will cease after 2014.
ADEQUATE PENSION FUNDING AIDED BY PLAN MERGERS
The city merged its closed police and fire pension funds into the state's pension plan, and most current employees are now members of the state-run Public Employee Retirement Plan (PERA), which consists of several sub-plans. Using a 7% rate of return assumption, all of the plans have average to below average funding levels ranging from 62% to 71%. Funding is done on a statutory basis with contributions equal to a percentage of payroll adjusted to achieve full funding in 25 years or less, depending on the plan. Contributions are expected to increase to reach these targets. Fitch believes that the city has adequate flexibility to absorb these increases.
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 moderate at $3,163 per capita and 2.8% of market property value. Principal amortization is rapid with 89% maturing in 10 years. The city's general obligation debt at the end of 2013 will be over 30% lower than in 2009 at $732 million versus almost $1.1 billion as a result of pre-payments, rapid amortization, and reduced issuance. In addition to its normal annual issuance, the city anticipates issuing about $170 million of additional bonds in 2014 to finance economic development projects downtown and renovations to the Target Center, home to the city's professional basketball teams. The teams will be covering about $50 million of the Target Center debt. Given the recent decline in debt levels and rapid amortization of the city's outstanding debt, Fitch believes this additional debt is manageable for the city.
Carrying costs in 2012 were a moderate 25% of government fund expenditures, though this figure was somewhat inflated by the pre-payment of debt, which will reduce carrying costs in the long term.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808058
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