CHICAGO — Minneapolis lost it its top credit rating from Moody's Investors Service due to the size of its pension burden and shift in how the rating agency assesses pension obligations.

The downgrade to Aa1 from Aaa impacts $679 million of general obligation debt. At the lower level, a stable outlook was assigned.

The rating agency had put the city's rating on review for a downgrade as part of its adjusted approach in analyzing the impact of pension obligations on local and state governments. Other Midwestern cities downgraded over the issue include Chicago, Evanston, and Cincinnati. Chicago suffered a three-notch downgrade earlier this month.

"We believe the Aa1 GO rating incorporates the city's sizeable adjusted net pension liability as well as the city's other long-term credit fundamentals," Moody's wrote.

The current rating reflects the "city's role as a regional economic center; consecutive years of valuation declines through 2012; well-managed financial operations with adequate reserve levels, moderating though above average debt burden, and outsized Moody's adjusted net pension liability," analysts said.

The driving factor behind the downgrade stems from the city's adjusted net pension liability that represents 4.3 times fiscal 2012 operating revenues. The city's other challenges include declining property value in each of the last six years although declines have begun to moderate, a dependence on state aid to cover operations, and reserves that remain below national medians despite some improvement.

The city's positive credit features include a sizeable tax base that benefits from diverse employment and includes stable sectors such as government, education, and health care. Financial operations are well-managed with multi-year planning and the city has shown a willingness to increase taxes or cut spending in order to balance operations and replenish reserves. It also has a relatively conservative debt portfolio.

The city first lost its Aaa rating from Moody's in 2001 but it was boosted back up in 2010 as part of its ratings recalibration.

In comments posted in local newspaper articles, the city's chief financial officer Kevin Carpenter countered Moody's assessment noting that the city's overall fiscal condition is on the upswing.

"Certainly pension obligations are important to the city's overall financial position, which is why we have worked so hard to stabilize our pension funds over the past decade," Carpenter wrote. "The new methodology is overly simplistic and puts too much emphasis on long-term pension obligations."

Fitch Ratings and Standard & Poor's assign the city top ratings. In a review last fall, Fitch highlighted the positive impact on city costs of the state approved merger of the city's closed police and fire pension funds into the state's pension plan.  Total pension payments represented about 13% of general fund expenditures and transfers out in 2012 and increased to about 15% in 2013. Using a 7% rate of return assumption, funding in the plans ranges from adequate to strong, according to Fitch.

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