MINNEAPOLIS-The city recently got bad news from a New York bond rating agency — a lower bond rating. The blow came when city’s AAA bond rating was downgraded by Moody’s Investors Service, indicating the eroding confidence the bond house has in the city’s financial management.

Moody’s says it is downgrading Minneapolis bonds from AAA to AA1. Downgrading bond ratings increases the cost of borrowing for a city.

Economic development issuance has been significant and the heavy use of tax increment financing by the city has resulted in tax increment totaling about 15% of its base.

The current expansion of the Convention Center adds $204 million of debt. Limited bonding is expected in 2002, but the majority of the $40 million in bonding for the new Central Library is expected to be issued between 2003 and 2005. Other added issuance includes $69 million for flood mitigation projects through 2006 and $144 million for ultrafiltration projects through 2007. Water and sewer rates are scheduled to increase annually over the next seven years in support of this major capital program.

While city financings have allowed Minneapolis to maintain a vibrant corporate and entertainment presence, the debt burden, which has dropped from a recent high of 9.1% in June 1998, remains well above average, although more manageable at 7.6%, according to Moody’s. However, two-thirds of the obligation is related to direct city obligations. Accordingly, debt service is increasing and now comprises over 29% of the city’s fiscal 2000 operations.

Still Moody’s believes the city will continue to retain its economic preeminence as a diversified Midwest urban center. Job opportunities formetropolitan residents continue to exist in the areas of high-tech and the health services industry, in addition to the numerous major corporations,institutions and entertainment facilities that are based within Minneapolis city limits. As a result of its large, diverse and expanding employment base,unemployment rates continue to be low, 1.7% for May 2001.

Significant and steady private and public investment has been heavily focused on the city’s Downtown redevelopment effort, according to Moody’s.

Substantial construction activity has occurred with new office, retail and hotel facilities built.

Residential construction has also been strong with more than 1,650 new dwelling units constructed from 1997 through 2000. A number of these residences have been built on former industrial/loft sites and have attracted both city residents and those returning from the suburbs. For the first time in 40 years the city’s population has increased: the 2000 census shows a growth of 3.68%.

Despite an abundance of new construction, recent office vacancy rates have been relatively low reflecting strong demand for new, modern rental space,according to Moody’s.

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