CHICAGO — Minneapolis Tuesday will take competitive bids on $105 million of tax-exempt and taxable general obligation refunding bonds in an offering officials are hoping will attract strong interest from investors, given the rarity of its high-grade paper and the deal’s size and noncallable structure.
Fitch Ratings and Moody’s Investors Service affirmed the city’s top credit marks and stable outlook ahead of the sale. Standard & Poor’s had not released a new report as of Friday. It rates the city’s $982 million of outstanding GOs AAA.
Northland Securities is advising the city and Kennedy and Graven is bond counsel.
The deal comes as the city conducts a search to replace departed chief financial officer Patrick Born, who left last month to lead the Metropolitan Council regional planning agency. The issue refunds convention center bonds issued in 1999, 2000, and 2002.
The 2002 bonds are now callable and the 1999 and 2000 bonds currently are in a variable-rate mode and will be shifted to a fixed rate, said Michael Abeln, the city’s director of capital and debt management.
The deal offers two series, a $33.8 million tax-exempt component and a $71.2 taxable one. The shift to taxable paper frees the city from tax code requirements limiting the use of private dollars to retire the debt.
Even with the shift to taxable on a large chunk of the bonds, the city still expects strong savings in the 7% net present-value range as the current tax-exempt bonds carry coupons of more than 5%. The smaller tranche of bonds are expected to generate double-digit savings.
“All of the issuance is driven by savings,” Abeln said. “We suspect the bonds will be sought after since there are larger maturities that are noncallable. We have a mix of tax-exempt and taxable and we have a triple-A.”
The city also is entering the market amid light supply.
Minneapolis has struggled to keep its budget balanced but its economy has proven more resilient than many other comparable cities during the recession. Its unemployment rate was 6.1% in December, compared to the national rate of 9.1% and the state’s rate of 6.8%.
Fitch said the rating is supported by conservative fiscal management that results in stable fiscal performance and strong reserve levels.
The city has seen its share of state aid dwindle since 2008 as Minnesota grappled with budget deficits, but some of those pressures were offset by a rapidly growing tax base. That growth ended in 2010 and is now expected to remain flat over the next few years.
To keep the $1.4 billion 2010 budget balanced and deal with $32 million in state aid cuts, the city cut spending and raised property taxes. It expects to close the books on 2010 with balanced operations and does not expect to need the $12.5 million draw on reserves included in the budget.
“While the city faces sizeable increases to pension payments in the next several years, Fitch expects the city’s willingness and demonstrated ability to align spending with available revenues will continue to preserve adequate fiscal reserves,” analysts wrote.
The 2011 budget includes a 4.7% property tax levy increase, cuts 80 positions, and includes a 6% increase in spending due to growing pension obligations that will total $55 million. Future state aid cuts remain a risk. The state is facing a $5 billion deficit in its next two-year budget and Republicans who control the Legislature last week offered up a menu of cuts that included local government aid. Gov. Mark Dayton, a Democrat, proposed a budget that relies on a mix of cuts and tax increases and does not cut the local aid program.
Heather Johnston, the city’s director of management and budget, is currently serving as interim CFO since Born’s departure last month to become regional administrator of the Metropolitan Council. Born left the private sector, where he worked as a financial advisory professional, to take the reins of the city’s finances in 2001.
“Mr. Born shares my commitment to improved transit and transportation in our region,” the council’s board chairwoman, Susan Haigh, said in a statement. “He also is committed to our goals of expanding the region’s supply of affordable housing and jobs. The council is fortunate to attract such a proven administrator and leader.”
Born said he was honored to be offered the post. “I welcome the opportunity to join a talented group of policy makers and public managers to achieve the council’s goals,” he said in a statement.