Minneapolis returns to the bond market Wednesday buoyed by a double dose of positive credit news for managing both the fiscal blows of COVID-19 pandemic and civil unrest fallout that followed George Floyd’s May 2020 killing by a city police officer.
Fitch Ratings raised the outlook to positive from stable on its AA-plus rating ahead of the city’s competitive sale of $141 million of new money general obligation bonds.
S&P Global Ratings returned its outlook on the city’s AAA rating to stable from negative. It had moved the
"Despite some lingering uncertainty around both public safety reform and the medium-term pace of economic and revenue recovery from the still-ongoing COVID-19 pandemic, the city has a fiscal roadmap in place that we believe sufficiently demonstrates how it will navigate the next few years while actively managing emerging and ongoing risks,” S&P analyst Scott Nees said of the outlook change.
Fitch said its positive outlook on the new deal and more than $700 million of outstanding debt “reflects the city's strong operating performance through the disruptions during 2020, including the pandemic and civil unrest” and an upgrade could follow “if the city is able to manage expenditure pressures associated with civil unrest and ongoing pandemic concerns and maintain structurally balanced operations once the federal stimulus funds are exhausted.”
The
Ehlers & Associates Inc. is advising the city and Kennedy & Graven is bond counsel.
“The rating agency’s outlook change is great news and portrays a relatively fair picture of where we are really at now,” said Allen Hoppe, the city’s director of banking, investments and debt.
The finance team believes the outlook changes recognize its navigation of a “very rough year for events impacting the citizens and staff” and its ability to adapt “even though that meant difficult belt-tightening decisions,” Hoppe said. “The change had less to do with changes to our conservative debt posture than to our ability to see a disciplined way through the challenges.”
The city leads off the “investment considerations” section of its offering statements with “Impacts Due to Coronavirus” and “Liabilities Related to Civil Unrest,” along with a proposed reorganization of the city’s police department on next week’s ballot.
The state’s largest city, which saw its population grow by 12.4% to 429,954 in the 2020 census, took an initial $44 million hit to sales taxes because of the coronavirus, and other revenue streams also suffered. The city tightened its belt and closed out 2020 with a $39.6 million increase in its general fund balance bringing it to $167.7 million. Federal aid of $32 million also helped as did unplanned state help.
The city estimates that it will end 2021 with a fund balance of $127 million, $45.9 million above target. The city’s 2021 budget raised the property tax levy by 5.75% and used $40 million of general fund reserves for capital with a transfer of $27 million to its self-insurance fund.
The city last year also bought some breathing room for its convention center debt in a GO deal that refinanced of that debt, pushing off the final payment due last December on the city’s expansion bonds until 2025 although it can call the bonds in 2022.
The 2022 budget further raised the levy by 5.45% and it relies on $47 million from the city’s $271 million of ARPA relief along with $17 million in general fund reserves to achieve balance. A total of $119 million of the aid package will help balance the 2022, 2023, and 2024 budgets, making up for prior revenue losses.
“Fitch believes that the city may be challenged to maintain structurally balanced operations if revenue growth is slower than projected, given its use of federal stimulus to fund the operating budget,” analyst warned.
S&P warned that it’s view could turn negative if the city draws its general fund reserves down more rapidly than currently planned or if there’s a material increase in liabilities from in its self-insurance fund, or if revenue recovery in key funds outside of the general fund significantly lagged current projection making balance more difficult after federal aid is exhausted in 2024.
The protests and riots that followed Floyd’s May 25, 2020, killing by Minneapolis police officer Derrick Chauvin 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, incited at least in part
The city settled a lawsuit with Floyd's family for $27 million but it’s still facing other lawsuits related to the civil unrest that followed the shooting. The city also is dealing with city worker compensation claims that are higher than historical averages.
The city continues work on quantifying potential liability claims and workers’ compensation claims. Based on current estimates, the city is raising budget allocations for the self-insurance funds and transferring $12 million to both the workers’ compensation fund and the liability self-insurance fund in 2022.
“Additionally, the city will continue to monitor claims exposure and will adjust budget allocations and the five-year financial direction/financial plan based on current claims data at least annually,” the offering statement reads.
Next week’s election looms large on the city’s future direction as voters will decide the fate of a police department reorganization that will likely draw national attention as cities across the country contemplate policing reforms.
Floyd’s killing sparked nationwide protests calling attention to police tactics and racial disparities leading to demands for a reassessment in the funding of urban policing.
Four Minneapolis police officers were fired, including Chauvin, who was convicted of murder and sentenced to a prison term of 22 and ½ years. The other three officers await trial on various charges. All four also face federal civil rights charges and have pleaded not guilty.
The city’s police department remains intact but is operating with fewer officers — 770 compared to 888 in 2020 as the department faced higher than normal attrition levels — and this year several specialty units like crime prevention were moved to other departments. The police chief and department currently report to the mayor.
The ballot proposal asks voters whether the Minneapolis City Charter should be amended to remove mention of a “Police Department” and replace it with a “Department of Public Safety.” It would employ a public health approach to the delivery of functions with specific functions to be decided by the mayor and City Council by ordinance.
The Department of Public Safety would no longer be subject to exclusive mayoral power over its establishment, maintenance, and command. The Department of Public Safety would be led by a commissioner nominated by the mayor and confirmed by the City Council. The Public Safety Department could include police officers, but the minimum staffing requirement based on population in the current city charter would be eliminated.
“The passage of this amendment would be a milestone for the city, but not one that we expect to create significant unfunded budgetary obligations, as the existing police department budget would simply be reallocated to accommodate new public safety functions,” S&P said.
“There is no financial impact" should voters approve one of the proposed charter questions that would impact mayoral control while the police reorganization “may or may not depending on how we establish the new public safety department if it were to pass,” Chief Financial Officer Dushani Dye said in a recent interview.
Voters will decide leadership posts. Mayor Jacob Frey faces 16 rivals in his bid for a second term, and the 13 City Council seats are up for election.
The finance department has seen some turnover.
Hoppe took over debt management in April as Mike Abeln retired after a 32-career with the city as director of capital and debt management.
Hoppe previously held local positions with the Minneapolis Board of Estimate and Taxation and the Metropolitan Council, and served as treasurer for the Washington Metropolitan Area Transit Authority.
Dye, who previously held financial posts at Hennepin County and Ramsey County, Minnesota, joined the city in August 2020, taking over from an interim CFO who replaced Mark Ruff as he took over as city coordinator in 2019. Ruff left that job in August for personal and family health reasons and Heather Johnston, who is a former director of management and budget, is serving as interim coordinator. Amelia Cruver, who joined the budget office in 2019, was elevated to director last March.
