The city of Madelia has little debt, and pays what it has quickly. Its conservative budgets create annual surpluses in both utility and general government accounts. And it has plenty of money saved up.
Moody’s Investors Services, a firm that examines how well governments and companies are able to pay their debts, heaped praise on the city during a recent credit rating change. The only surprise was the direction of the change — Moody’s lowered the city’s credit rating.
The agency cited residents’ relatively low incomes and steep declines in the city’s tax base.
Madelia is not alone. About 40 Minnesota cities, including six in south- central Minnesota, have seen their credit ratings lowered in the past 18 months, almost all by Moody’s. There was only one downgrade in 2011.
One area city, Le Center, dropped seven notches in a so-called “super downgrade,” in 2012, causing the city to lose its “investment grade” status. It was downgraded two notches further, to B1, earlier this year.
The trend, first reported by Watchdog.org, has some cities and analysts wondering if Moody’s is accurately gauging these cities’ financial health. Declines in tax base are cited as a reason for the downgrade in nearly every case, though most of the downgraded cities have other problems as well. Many or most Minnesota cities lost some tax base in the recession as home prices fell, but a steeper decline took effect in 2012 after the Legislature changed how taxable value is calculated.
To give lower-valued homes a tax break, the Legislature decided to exempt part of their value from taxes. This shifted the tax burden to more- expensive houses and businesses, but it did not, by itself, affect the amount of taxes cities collected. There was still a tax consequence, though, as cities were forced to raise their tax rates to compensate for the reduction in tax base.