Minneapolis will enter the bond market for the first time since the COVID-19 pandemic and the civic unrest that followed George Floyd’s May killing by a city police officer.
S&P Global Ratings lowered its outlook for the city's AAA rating to negative ahead of the $137 million competitive deal, which is slated for Thursday.
“The ongoing COVID-19 pandemic has created a budget gap with little precedent in fiscal 2020, and will likely continue to pressure the city's fiscal position in 2021, absent a significant turn of events,” said S&P analyst Scott Nees.
“George Floyd's death has exposed Minneapolis directly to large legal settlements, and the civil unrest and calls for police reform in its aftermath have created an elevated likelihood of the extraordinary costs mentioned previously that could pressure the city's budget for a prolonged period,” Nees said.
Ahead of the sale, Fitch Ratings affirmed the city’s AA-plus rating and stable outlook. The city has $632 million of GO debt.
Bids will be taken on $98 million of general obligation bonds, $13 million of GO parking assessment refunding bonds, and $26 million of taxable GO convention center refunding bonds. Ehlers & Associates Inc. is advising the city and Kennedy & Graven is bond counsel.
“I think the most important thing is that our rating remains AAA,” said Mike Abeln, the city’s longtime director of debt and capital management.
The rating affirmation recognizes that the city has taken steps to manage the pandemic’s tax hit but the outlook erosion serves a reminder that the city must manage its pressures “in a way that doesn’t impact the credit rating” and that involves “the city doing the things it has always done like adjusting our budget when needed,” Abeln said.
Floyd’s May 25th death led to the firing of four police officers who are facing criminal charges. It creates a separate set of economic and policy pressures as reform efforts unfold and litigation looms.
Floyd’s death sparked nationwide protests calling attention to police tactics and racial disparities leading to demands for a reassessment in the funding of urban policing. In Minneapolis, a majority of city council members support dismantling the department.
The protests and riots that followed Floyd’s killing caused an estimated $106 million worth of property damage. That included commercial and city property with the most significant damage to city-owned infrastructure the destruction of the 3rd Precinct police station, which was set ablaze during demonstrations several days after Floyd’s death. It carries a price tag of $12 million.
Mayor Jacob Frey’s proposed 2021 budget that will be voted on in December includes some funding for police reforms but the path and costs remain uncertain. The city also faces liabilities from lawsuits associated with Floyd’s death and has reported elevated worker compensation claims related to the subsequent period of civil unrest.
In a section of the offering document labeled “Liabilities Related to Civil Unrest,” the city warns it faces potential liabilities from lawsuits and from city employee’s worker compensation claims due to the civil unrest.
“The city attorney’s office is quantifying potential claims on a regular basis. The city’s finance and property services department is also quantifying potential worker compensation claims,” the section reads. The city anticipates increasing annual department budget allocations for the city’s self-insurance funds.
The rating affirmation recognizes that the city has taken steps to manage the pandemic’s tax hit but the outlook erosion serves a reminder that the city must manage its pressures “in a way that doesn’t impact the credit rating” and that involves “the city doing the things it has always done like adjusting our budget when needed,” Abeln said.
New money proceeds will finance capital improvements and equipment purchases while the refinancing will provide some near-term breathing room to manage debt repayment as the pandemic’s economic blows have stung repayment streams.
The convention center refinancing will push off the final payment due in December on the city’s expansion bonds until 2025 although it can call the bonds in 2022. The bonds carry a GO backing but are repaid primarily with sales taxes that have been hit hard amid the pandemic.
“It’s a proactive approach. We have the cash on hand and could make that payment but we want to maintain” capital and operating fund balances as a cushion “just in case” the COVID recovery is prolonged, Abeln said.
The parking assessment refinancing will smooth out the existing repayment structure, extending the series by several years to provide near-term relief. The overall final maturity on the city’s full parking assessment debt portfolio won’t be extended.
Fitch held the city’s outlook steady concluding that it has “sufficient gap-closing capacity to offset the revenue declines associated with the current, severe downturn by making limited cuts to services coupled with modest reductions to its reserve cushion.” The credit profile also has benefited from a decline in long-term liabilities thanks to state-passed pension reforms several years ago.
The city lays out its fiscal perils under the “investment considerations” section of the offering statements.
The total 2020 economic impact of the pandemic is estimated at $156 million including a $55 million decline in local option sales taxes, $28 million from parking revenues, $18.6 million in property taxes, and $13.2 million in convention center revenues.
The city implemented a hiring freeze and partial wage freeze, cut some positions, revised some contracts and cut other spending to offset $86.2 million of the gap. The city is using debt to cover $12.3 million of capital projects that it had previously intended to cover with cash and will tap $57.5 million from available cash reserves. The general fund is expected to end 2020 with $116 million of available reserves.
The city council forwarded a ballot proposal to the city’s Charter Commission that would replace the police department with a department of community safety.
It would include a division to continue existing core services involving licensed peace officers as required under state law. The new department would report to both the City Council and the Mayor whereas the police chief and department currently only report to the mayor. The number of officers per resident would change. The department currently operates with 890 sworn officers.
The Charter Commission voted last month to take an additional 90 days to study the ballot proposal so the earliest city voters could consider a ballot question is February 2021.
