Hard Times at City Hall

The State of the City? We're Broke.

The city report to Moody's paints a bleak picture. Since 1997, it notes, the Internal Services Funds has lost an average of $4.2 million a year, just on new equipment. And in 2000, the fund was $24.6 million short.

Merely one example of poor fiscal policy, Kriz notes, is that between 1993 and 1999, the city issued $3 million in bonds for legal settlements. "Three million dollars is not a large sum of money to issue bonds over, and it would be wiser to just pay it off," Kriz claims. "What you have here is the city essentially borrowing money from itself, from fund to fund, and it looks bad to bond houses."

The city does not have an inordinate amount of debt from "general obligation" bonds, which are repaid with property taxes. But it does have a large portfolio of "self-supporting" bonds, which are supposed to be paid off with revenues raised by the project in question, such as the Convention Center or Orchestra Hall. If those developments perform sluggishly or fail altogether, the city is stuck paying off the bonds with other funds. In 2001 Minneapolis had $829 million in bonds that were supposed to be self-supporting but wound up being counted as general obligation bonds, to be repaid with tax dollars.

Any further downgrades could make it hard for the city to issue additional bonds; right now the other two bond-rating houses, Standard and Poor's and Fitch, are looking long and hard at the city's account balances. "The city is in tremendous jeopardy," Minn concludes. "I believe they'll lose their AAA rating [with the two other bond houses] and continue to be downgraded."

 

Business lobbyists and fiscal conservatives hammered at property tax issues all through the 1990s, and during those years holding the line on property tax increases was a political imperative for the Sayles Belton administration and the city council. But the Moody's downgrade bolstered widespread suspicions that no one at city hall was minding Minneapolis's bottom line. In 2001 R.T. Rybak and candidates for several open council seats campaigned hard on the bond-rating issue and won.

The newcomers inherited a long-fermenting fiscal mess. When Rybak came to office a year ago, his first state of the city address sounded a grave note, and he immediately set out to make up deficits in the 2002 budget left by his predecessor. Rybak and the council passed a 2003 budget that dealt major cuts to many departments, and city leaders said they would continue dealing with shortfalls in future years. (The 2003 budget is balanced on paper, but that involves some wishful accounting: $268 million in collections is marked to come from "other" and "other funds." And another $158 million is believed to be coming from the state.)

But make no mistake--the problems aren't solved. The debt hangs over practically every meeting, memo, and water cooler conversation at city hall. On January 30, tempers flared during a city council Committee of the Whole meeting when talk turned to adoption of Minneapolis's proposed five-year plan. The plan essentially puts the brakes on spending out of the general fund by stipulating that the annual growth in expenditures, previously projected at seven percent per year, should be limited to 4.2 percent instead. The plan likewise proposes to limit the growth of spending on police services, but at least there will be increases; other funds, like health and family services, are slated to remain virtually flat.

Debate eventually turned to the plan's emphasis on continued public safety funding at the likely expense of social services and economic development. Barret Lane (13th Ward) became livid; the council, he said, was engaging in class warfare rather than dealing with financial realities.

"You can assume that I don't understand these issues, and that's fine," Lane told his colleagues. "But we have got to get our act together. The people who will suffer are the people who can least afford it. If we don't have everybody in this city pulling on the same oar, we will all go down the same tube."

As council members continued to debate the financial plan, they deferred time and again to Patrick Born, the city's finance director. One of the main architects of the five-year plan, Born has lately been a central figure at city hall, a reassuring presence capable of rendering the complexities of city finance in plain English. One of the things city leaders have been most eager to quiz Born about is the viability of extending the payment term on many of the city's bonds--the practicality, in other words, of deferring debts down the road yet again. Born and other city budget staffers had come up with a plan to extend some bond payments from five years to seven and a half years; did this mean that extending them further, to 10 or 20 years, would erase the short-term pain?

Born told them that it would be a double-edged sword. Some purchases, he explained, have an "asset life," and it wouldn't make sense for the city to be paying for something that it had stopped using years before. "Let's take a fire truck, something I know virtually nothing about, other than I can recognize one," Born offered. "Let's assume its average life is 20 years. We would borrow for a period not exceeding 20 years. But when we issue bonds, we typically pay annually, so by the 10th year, we will have paid 50 percent of what we borrowed. Likewise, the truck will have depreciated 50 percent. We've probably upgraded the truck along the line, maybe it needed a new bumper. But I will tell you, in general, we're not going to use it for more than 20 years.

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