Updated at 2:10 p.m.
Moody's Investors Service downgraded Minneapolis's credit rating Monday night, delivering a blow to one of Mayor R.T. Rybak's signature achievements.
The downgrade means the city could pay higher interest rates when it issues bonds for major projects. It comes three years after the city restored it's AAA rating with Moody's, after sitting at Aa1 since 2001.
That AAA credit rating has been frequently touted by both the mayor and City Council as evidence that they have righted the city's finances after years of poor management.
But as of Monday night, Minneapolis was returned to Aa1, one rank below AAA, for its $679 million of outstanding general obligation debt. The city retains AAA ratings with the other two major rating agencies, Fitch and Standard and Poor's.
Challenges cited by Moody's included declining property values, high pension liabilities, sizeable fixed costs, dependence on state revenue and above average debt levels. They lauded the city's financial management and willingness to raise taxes, however.
Jay Kiedrowski , a senior fellow at the Humphrey School of Public Affairs, said the downgrade is unlikely to have a financial impact on the city because Moody’s rating remains high and the city has two other AAA grades.
“It’s more of a public relations hit than it is a financial burden for the city. You always want the AAA because you want to be a AAA city," Kiedrowski said. "But being Aa1 with the other two agencies being AAA means the bonds are likely to sell very similar to a AAA bond in the marketplace if not trade the same as they’ve always traded.”
Moody's gave the city a "stable" outlook based on expectations "that the city's tax base will strengthen" and "financial operations will remain healthy given strong management policies and positive performance despite revenues pressures."
The state of Minnesota shares a Aa1 rating with Moody's, after being downgraded in 2011.
The downgrade of the city is part of Moody's "new approach" to analyzing state and local pension liabilities. "We believe the Aa1 [general obligation] rating incorporates the city's sizeable adjusted net pension liability as well as the city's other long-term credit fundamentals," the company said in a statement.
The city's chief financial officer, Kevin Carpenter, said in an e-mail to City Hall officials Monday night that the new methodology is "overly simplistic" and rests too heavily on long-term pension obligations.
"Certainly pension obligations are important to the City’s overall financial position, which is why we have worked so hard to stabilize our pension funds over the past decade," Carpenter wrote. "Indeed, this action by Moody’s comes less than one year after Minneapolis had received a Aaa rating from the agency in 2012, and since that time our financial situation has continued to improve."
The downgrade did not address the recent state takeover of the city's closed police and fire pensions, which took a load off of the city's budget. The Moody's report said that the state takeover of the city's closed police and fire pensions, which took a load off of the city's budget, "helped stabilize pension contributions for the city while improving the funded ratios."
Monday's downgrade announcement is likely to send ripples through the mayoral campaign. The first candidate to jump on the news was independent Cam Winton, who outlined a plan to correct many of the problems cited by the agency in a statement to reporters.
Photo: Mayor R.T. Rybak