Minneapolis readies bond sale as city weighs increase to project borrowing cap
CHICAGO – Minneapolis takes competitive bids on $74 million of general obligation bonds Tuesday as the city moves toward raising its $15 million cap on individual city project borrowing to improve fiscal transparency and avoid additional borrowing costs.
The city council is holding hearings on the proposal to amend its charter raising the city’s general obligation borrowing cap to about $80 million per project to account for inflation. The existing limit in the city’s charter dates back to 1973. The charter caps city subsidies for professional sports stadiums to $10 million unless voters approve more.
With big city building projects rising over the decades, the city has maneuvered around the cap by using other state statutes or special legislative authority to borrow, but such actions can complicate the process and make it look like the city is trying to bypass its rules.
“It doesn’t really stop us from doing” some projects, so “it’s a transparency issue” for some city council members who say a change would allow for a more efficient review by the council and Board of Estimate, and Taxation under charter rules, Minneapolis chief financial officer Mark Ruff said.
With the council pressing for more spending on affordable housing and energy efficiency projects, Ruff said the higher cap would simplify the financing process and avoid higher borrowing costs.
“We’ve had to look at the possible use of appropriation bonds” to finance projects where there’s no existing state statutory avenue which is the case for those sectors, Ruff said.
Appropriation credits are typically rated at least one notch under a GO credit, meaning higher interest rates. The city likes to use its GO on most borrowing given its high ratings even when a specific revenue stream is earmarked to repay the borrowing.
The council’s Ways & Means Committee has signed off but several other committees will weigh in before a council vote on the amendment. It requires a 13-0 vote by the council and approval of the Charter Commission to take effect 90 days after passage.
Ahead of its Tuesday issue, Fitch Ratings and S&P Global Ratings affirmed the city’s AA-plus and AAA ratings, respectively. The city has $458 million pf debt.
The deal includes a mix of $40 million of tax-exempt GO and various purpose bonds to finance capital spending and $33 million of taxable GOs, most of which will take out the remaining piece of the city’s temporary financing for its share of the Target Center project in 2016.
The tax-exempt piece funds a variety of under-$15 million projects. The taxable piece for the basketball arena was authorized under state stadium legislation.
Fitch said its AA-plus rating “incorporates favorable revenue growth prospects, broad independent revenue-raising ability, moderate long-term liabilities relative to the city's economic resource base and solid budgetary flexibility. The city has sufficient budgetary flexibility to offset revenue declines in a moderate downturn by making limited cuts to services coupled with modest reserve reductions.”
Minneapolis is the largest city in Minnesota with a population of 413,651 that in combination with twin city St. Paul across the Mississippi represents the second largest economic center in the Midwest after Chicago.
The city's five-year 2018-2022 capital improvement plan identifies $909 million in projects with 55% funded by debt. A new consolidated office building in the works will cost $210 million.
The city achieved a $9.6 million general fund operating surplus for 2017 with unrestricted reserves of $116 million, or about 23% of expenditures. The fiscal 2018 budget includes a 5.5% tax levy increase across all funds and the use of $17.3 million of reserves of which $5 million will serve as a contingency with the remainder budgeted for one-time uses including equipment purchases and other capital needs, Fitch said.
The city’s AAA rating stems from its “very strong economy, with access to a broad and diverse metropolitan statistical area” and “very strong management, with strong financial policies and practices,” S&P said. The city last year recorded its sixth consecutive year of $1 billion or more in permitted construction projects, has a lower overall debt burden, and rapidly repays it with 77% of debt retired in 10 years.
Minneapolis' combined required pension and other post-employment benefit contributions totaled 8% of total governmental fund expenditures in 2016. Pending state pension legislation would result in modest increases by employers.
The city calculates that its combined net pension liability will fall to $643 million in 2017 under a formula that accounts for new Governmental Accounting Standards Board rules with the improvements in funding coming primarily from a strong year in investment returns and assumption changes.