MINNEAPOLIS -- The City of Minneapolis is dealing with a disappointing credit rating setback. Moody's Investor Service said Monday it was knocking the city's credit rating down a notch from a AAA rating to a Aa1 rating. This means the city could possibly face higher interest rates when it borrows for construction projects. The Aa1 rating is the second highest possible rating.
Among the reasons for the decline, Moody's cites high pension liabilities, declining property values, and $679 million in outstanding debt. This comes after the City of Minneapolis and Mayor RT Rybak worked to steer the city out of financial shortfalls, landing the AAA rating three years ago.
"I am a resident of Minneapolis and I'm not going to lose any sleep over the fact we are a Aa1 rather than an AAA by Moody's," said Jay Kiedrowski, a University of Minnesota Humphrey School Fellow and a former budget director for the City of Minneapolis. "Moody's doesn't like pension debt and I think they were concerned about Minneapolis pension debt even though the City of Minneapolis has been proactive about trying to take care of pension debt."
He says Moody's recently tightened criteria when it comes to pensions, and the move that could cost the city and taxpayers a tiny bit more than before.
"Buyers of bonds in the marketplace will likely require higher interest rates, which translates to slightly higher property taxes but we are talking about a dime or twenty cents a year," said Kiedrowski.
Kevin Carpenter, the City of Minneapolis' current financial officer, argues that borrowing costs will not be affected and says Moody's new methodology is overly simplistic. He cites a trend in financial growth, with a growing tax base from construction projects, and payments of over $550 million in debt from the city's $1.3 billion shortfall seven or eight years ago.
"We just think it's an overreaction of a long term risk to the city. We take our pension obligations very seriously," said Carpenter. "This action won't affect our borrowing costs, we still have AAA ratings from two other agencies and I think this will be negligible if any on our borrowing costs."
Carpenter says Moody's put the city of Minneapolis on a credit watch, along with 29 other cities back in April, when examining new pension criteria. In an email statement, he told city employees that despite Moody's rating, the city's financial future is bright.
"While we think that the action by Moody's is an overreaction to one element of the City's financial portfolio, you should remember that Minneapolis remains among the top-rated cities and local districts in the country....because Minneapolis retains the highest possible credit ratings from the other two rating agencies, Fitch and Standard and Poor's, we do not anticipate that this one-notch adjustment from Moody's will have any material financial impact on the city's fiscal health moving forward," Carpenter wrote.
"It's a small negative for the city of Minneapolis but in the grand scheme of things, it's not that big of a deal," said Kiedrowski.
The city did earn a "stable" outlook based on expectations of a strengthening tax base and other considerations.
Tuesday, Moody's upgraded its outlook on Minnesota's financial status from "negative" to "stable." The state of Minnesota also currently has the Aa1 rating as well.
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