CHICAGO — Triple-A rated Minneapolis today will competitively sell $130 million of general obligation bonds to raise funds for routine capital projects and to refund debt for about 12% of net present-value savings.
The sale includes four series, including one for $32.3 million of new money. The city rapidly amortizes its debt in under 10 years so there is little net debt-service savings achieved by tapping the Build America Bond program that provides more benefits on mid- to longer-term maturities.
The deal also will refund $8.7 million of tax-increment GO bonds, $14.9 million of taxable tax-increment GOs, and $74.9 million of various-purpose GO s. The $14.9 million is taxable due to private payments included in debt repayment.
The city typically waits for the call dates to current refund its debt, but decided to act because of the significant savings that would be generated due to the decline in interest rates.
The bonds being refunded are also close to their call dates, so there is little negative arbitrage to cut into the overall savings.
“We’ve been watching the market for a while and were compelled to act. It’s a very attractive refunding for savings,” said the city’s chief financial officer, Patrick Born.
Northland Securities is financial adviser on the deal and Kennedy & Graven is bond counsel.
Minneapolis closed the books on 2009 with a stronger-than-expected general fund ending balance of more than 15%. It was forced to cut deeply into spending in both 2008 and 2009 to offset declining state aid and revenue shortfalls without dipping into its fund balance and drew down about $5.6 million in reserves.
The city’s 2010 budget totals about $1.4 billion, including a $370 million general fund.
Though Minneapolis is struggling like most of its counterparts with cuts in aid to local governments due to state budget troubles, the Minnesota Legislature did aid the city by merging one of its three older, closed pension plans, which was on a path to default, into the state municipal employees plan.
Under the legislation, the city and other public agencies that once had employees enrolled in the pension plan will see an increase in contributions.
Minneapolis’ share is rising to $12 million next year from a current rate of $4 million, but the state also will increase its contribution.
The plan was long ago closed to new members and only 174 employees remain on the payroll and under the plan. With current employee contributions dwindling to support 4,500 retirees and beneficiaries and stock market losses, the fund’s unfunded liability reached $700 million.
The city has factored the increased payments into its long-term budget planning, according to Born. “The plan was likely to be insolvent in the next seven to 10 years, so this legislation resolves a big problem,” he said.
Ahead of the sale, all three rating agencies affirmed Minneapolis’ top ratings on $1 billion of GO debt.
The city’s credit benefits from a broad economy, low unemployment, and conservative fiscal management, but it’s challenged by state funding cuts and operating pressures due to increasing pension payments and revenue performance. The city faces a total loss of $32 million various state aid payments this year.
“The stable outlook reflects Standard & Poor’s expectation that the city will maintain a strong fund balance position as it continues to use its financial management practices to monitor expenditures amid the likelihood of continued reductions in state aid and declines in revenue sources due to broader economic conditions,” analysts wrote.
Fitch Ratings wrote: “The maintenance of adequate fund balance levels in accordance with city policy is an important credit consideration” going forward.
Moody’s Investors Service, which last month recalibrated the city’s rating to Aaa from Aa1, said its stable outlook is based on Minneapolis’ “regional economic preeminence and expected ability to address infrastructure needs without significantly increasing debt levels.”