Vicky Heller recently submitted a list of questions for the Fitch bond-rating house, which recently gave Minneapolis a Triple-A rating with a negative outlook.
As Vicky asked, I forwarded the questions to Fitch. Here are their answers, cobbled together by me based on an interview with a Fitch analyst. It's occasionally dense reading, but edifying. 1. How much does Minneapolis pay Fitch for rating its bonds? Fitch's standard answer is between $1,000 and $150,000, depending on the size of the work. That can be viewed as a conflict. However, the analyst who performed the rating, Joseph O'Keefe, did say that there is competition in the rating business, and if a bond house was too sunny-side up in the ratings, its credibility would drop and therefore its income. 2. What is their formula for determining "moderate tax-supported debt levels"? Fitch uses a variety of ratios. In this case, they added up all the debt supported by taxes (direct debt). They deduct property tax debt also supported by user fees (water, sewer and parking). In this case, for Minneapolis, Fitch also deducted for the Convention Center bonds supported by sales taxes. Then they add in the share of other debt (such as Hennepin County's, light rail, etc.) that Minneapolis taxpayers account for. The final figure is of total overall net debt. Then they divide this debt by the value of the property tax base, which Fitch says is often the best indicator of what is supportable. They also look at debt levels per capita. In general, the "moderate" designation is given to debt levels between $1,000 and $5,000 per person; over $5,000 is "high." 3. What do they mean by "ample financial flexibility"? That's a result of a long process that includes document reviews and meeting the city officials. For example, they had a five-hour meeting with city's finance team to talk about long-term budget policy. What most bond buyers want to know is if a situation is getting better or worse. Fitch is more interested in what they think the preparedness would be if an economic problem arose. Does the city have things at their disposal to fix a broken budget? Can they raise taxes given tax capacity? Can they politically cut spending? Compared to other cities around the country, Minneapolis has a greater ability and willingness to adjust than other cities. Part of that is reserves, which can get past a crisis of a few months. Another part is a record of trimming spending when necessary, which can bring longer-term solutions. Minneapolis received the top rating, a Triple-A, but Fitch changed the momentum direction to negative because of pension debt over the next few years and lingering internal service fund deficits (purchases previous administrations made sort of on a credit card.). The problems in the internal service funds were several. The largest were payments to settle claims against the city's self-insurance fund and the faster depreciation of equipment (e.g., motor vehicles) than initial expectations. To remedy the situation, the city has implemented programs that try to limit financial exposure and city departments are charged appropriate amounts that reflect actual experience. The problems were not credit problems, but rather deficient accounting and risk management practices, which we believe are now corrected. Still, several more years are necessary to workout the deficits without increasing taxes further. Also, Fitch saw that the city has begun to issue a lot of pension debt, but they were not sure how much debt would increase over time that could force tax hikes or service cuts that are not politically acceptable. However, they saw that city officials have done things, including a long-term financial workout plan, to pay down the debt and proactively manage risk. Also, Fitch feels the city's financial team is dealing with things in capable way so that taxes would not rise above ability to pay and cuts would be not so deep as to be politically impossible. 4. Ask for copies of the financial data that the City gave to Fitch, so that we can compare it with the financial data that the City gives to the public. Usually, it's all publicly available stuff. Municipal documents and reputable market analyses including reports on the real estate market, city financial data, office market forecasts, vacancy rates, rental rates. Nothing startling that's not out there. The key documents are financial audits, the city's comprehensive annual financial report, its budget and its capital program. 5. Is Fitch aware that $7.8 BILLION of Minneapolis real estate is NOT TAXABLE? Yes, absolutely. That is reflected in the calculations of the tax base, and the debt calculation. 6. Does Fitch know that our dirty little secret called "tax capacity" actually REDUCES the taxable market value of Minneapolis real estate? Not surprisingly, they are very aware of it. They also know about fiscal disparities and all the other ways Minnesota and the metro area share/switch/limit tax base. Analyst O'Keefe noted that the really big drop in tax capacity came a few years ago (during Gov. Ventura's commercial-industrial-apartment property tax cuts). Tax capacity is a component that goes into Fitch's judgment of the city's ability to increase taxes. It's a reality Minneapolis has to face. David Brauer Kingfield REMINDERS: 1. Think a member has violated the rules? Email the list manager at [EMAIL PROTECTED] before continuing it on the list. 2. Don't feed the troll! Ignore obvious flame-bait. For state and national discussions see: http://e-democracy.org/discuss.html For external forums, see: http://e-democracy.org/mninteract ________________________________ Minneapolis Issues Forum - A City-focused Civic Discussion - Mn E-Democracy Post messages to: mailto:[EMAIL PROTECTED] Subscribe, Un-subscribe, etc. at: http://e-democracy.org/mpls
