[Mpls] Bond rating questions

[Becker]

Vicki Heller wrote:

>Total debt service in 2002 was $210 million, up from $137 million in 2001,
an increase of $73 million, or 53% IN ONE YEAR!

>During the same period, tax revenues dropped by $11.5 million.......

I have to also say that during 2002, there was a peak in sunspot activity
and that I gained about four pounds.  Amazing that if you put a couple of
facts together people assume that they are related even when they are not.
To clarify, neither my weight gain nor the sunspot activity are related to
the City's increase in debt service.

Nor are the property tax revenues necessarily associated with debt service
changes.   There are lots of different kinds of bonds sold by the City, paid
off with lots of different sources of funds.  General tax revenues are
actually a pretty small part of the overall sources of revenue that support
debt. Some of the different kinds of bonds that the City sells are water
bonds, sewer bonds, internal service fund bonds, sales-tax supported bonds,
tax increment financing bonds, revenue bonds, general obligation bonds.  The
City even sells revenue bonds that are used to support things like hospital
or school expansions that the City puts not one dime of its own money into.
One really has to disaggregate to understand what is going on with the
City's debt.  Each revenue stream needs to be matched with each debt level
to understand what is going on with each.

Vicki also wrote:

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

There is some implication that the bond rating agencies are in "cahoots"
with the City as the City pays something to rate the bonds.  The City's
bonds are usually rated by three different agencies, lessening any impact of
cahoots. Also rating agencies would not be believed if they were perceived
as being in cahoots with the agencies that they rate as the whole purpose of
a rating agency is to give an independent review of the credit-worthiness of
an organization.

Vicki also wrote:

>4 (a reporter should) 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.

The City doesn't have the ability to maintain two different set of books,
one for the rating agencies and one for everyone else.  The rating agencies
get the same CAFR reports that are audited by the independent State Auditor
the same as everyone else.

Vicki also wrote:

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

Pretty much everyone who is a geek enough to care about this stuff is aware
of this.  The percentage of tax exempt property is higher in St Paul due to
it being the state capital and having a higher percentage of property owned
by the government.    Washington DC has one that is much much higher.

Vicki also wrote:

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

Tax capacity isn't a "dirty little secret."  And it doesn't "reduce" the
taxable market value of Minneapolis real estate.  It is the formula for how
taxes are calculated.  Now it is a bit complex (OK there are probably about
six people in the state that really understand all of the nuances but....)
but not a "dirty secret."

In very general theoretical terms, the way that the property tax works is
the following:

You have an assessed value set for your property.  That is an estimate made
by the assessor of what it is worth on the market.

Different kinds of properties are then weighed differently.  The idea is
that wealthier people owning more expensive properties should pay more.
Also, government is interested in providing incentives to home ownership and
the theory is that revenue producing property should also pay more taxes and
home ownership should be less expensive.  This means that there is a
weighting system that adjusts the assessed market value based on the type of
property.  This weighting is called the class rate and the weighted value
for each individual property is the property's tax capacity.

The taxing agency then adds up all the tax capacity for all the property in
the taxing jurisdiction and basically divides the total amount of money it
needs by the total tax capacity to come up with a "tax capacity rate" which
is then multiplied by each property to figure out each individual property's
taxes.

There are many more tweaks than I have reflected here but this is the basic
idea.  No "dirty little secret" just a complex system.

It also doesn't reduce or increase the taxable market value of Minneapolis
real estate.  Tax capacity has no effect on taxable market value.

Carol Becker
Longfellow
Geek