[Mpls] Bond rating questions

[David Brauer]

Vicky Heller recently submitted a list of questions for the Fitch
bond-rating house, which recently gave Minneapolis a Triple-A rating with a
negative outlook.

As Vicky asked, I forwarded the questions to Fitch. Here are their answers,
cobbled together by me based on an interview with a Fitch analyst.

It's occasionally dense reading, but edifying.


1. How much does Minneapolis pay Fitch for rating its bonds?

Fitch's standard answer is between $1,000 and $150,000, depending on the
size of the work. That can be viewed as a conflict. However, the analyst who
performed the rating, Joseph O'Keefe, did say that there is competition in
the rating business, and if a bond house was too sunny-side up in the
ratings, its credibility would drop and therefore its income.

2. What is their formula for determining "moderate tax-supported debt
levels"?

Fitch uses a variety of ratios. In this case, they added up all the debt
supported by taxes (direct debt). They deduct property tax debt also
supported by user fees (water, sewer and parking). In this case, for
Minneapolis, Fitch also deducted for the Convention Center bonds supported
by sales taxes. Then they add in the share of other debt (such as Hennepin
County's, light rail, etc.) that Minneapolis taxpayers account for.

The final figure is of total overall net debt. Then they divide this debt by
the value of the property tax base, which Fitch says is often the best
indicator of what is supportable.

They also look at debt levels per capita. In general, the "moderate"
designation is given to debt levels between $1,000 and $5,000 per person;
over $5,000 is "high."

3. What do they mean by "ample financial flexibility"?

That's a result of a long process that includes document reviews and meeting
the city officials. For example, they had a five-hour meeting with city's
finance team to talk about long-term budget policy.

What most bond buyers want to know is if a situation is getting better or
worse. Fitch is more interested in what they think the preparedness would be
if an economic problem arose. Does the city have things at their disposal to
fix a broken budget? Can they raise taxes given tax capacity? Can they
politically cut spending?

Compared to other cities around the country, Minneapolis has a greater
ability and willingness to adjust than other cities. Part of that is
reserves, which can get past a crisis of a few months. Another part is a
record of trimming spending when necessary, which can bring longer-term
solutions.

Minneapolis received the top rating, a Triple-A, but Fitch changed the
momentum direction to negative because of pension debt over the next few
years and lingering internal service fund deficits (purchases previous
administrations made sort of on a credit card.).

The problems in the internal service funds were several. The largest were
payments to settle claims against the city's self-insurance fund and the
faster depreciation of equipment (e.g., motor vehicles) than initial
expectations. To remedy the situation, the city has implemented programs
that try to limit financial exposure and city departments are charged
appropriate amounts that reflect actual experience. The problems were not
credit problems, but rather deficient accounting and risk management
practices, which we believe are now corrected. Still, several more years are
necessary to workout the deficits without increasing taxes further.

Also, Fitch saw that the city has begun to issue a lot of pension debt, but
they were not sure how much debt would increase over time that could force
tax hikes or service cuts that are not politically acceptable. However, they
saw that city officials have done things, including a long-term financial
workout plan, to pay down the debt and proactively manage risk.

Also, Fitch feels the city's financial team is dealing with things in
capable way so that taxes would not rise above ability to pay and cuts would
be not so deep as to be politically impossible.

4. Ask for copies of the financial data that the City gave to Fitch, so that
we can compare it with the financial data that the City gives to the public.

Usually, it's all publicly available stuff. Municipal documents and
reputable market analyses including reports on the real estate market, city
financial data, office market forecasts, vacancy rates, rental rates.
Nothing startling that's not out there. The key documents are financial
audits, the city's comprehensive annual financial report, its budget and its
capital program.

5. Is Fitch aware that $7.8 BILLION of Minneapolis real estate is NOT
TAXABLE?

Yes, absolutely. That is reflected in the calculations of the tax base, and
the debt calculation.

6. Does Fitch know that our dirty little secret called "tax capacity"
actually REDUCES the taxable market value of Minneapolis real estate?

Not surprisingly, they are very aware of it. They also know about fiscal
disparities and all the other ways Minnesota and the metro area
share/switch/limit tax base.

Analyst O'Keefe noted that the really big drop in tax capacity came a few
years ago (during Gov. Ventura's commercial-industrial-apartment property
tax cuts). Tax capacity is a component that goes into Fitch's judgment of
the city's ability to increase taxes. It's a reality Minneapolis has to
face.

David Brauer
Kingfield