Minneapolis will return to market this week with a negative outlook on its one of its triple-A bond ratings.

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S&P Global Ratings Friday lowered the outlook to negative on its AAA rating of Minneapolis’ general obligation bonds, citing expected weakened reserves.

The action comes ahead of a $269.26 million competitive GO sale Wednesday.

CFO Dushani Dye told The Bond Buyer that “police overtime has drained our fund balance over the last few years because of not budgeting adequately,” and said the city is expecting to dip below its target fund balance by the end of the year. 

“In prior years, we’ve been in the 25% range in the minimum fund balance,” she said. “Now we’re going to be around 14% by the end of the year. So our goal is to get back above the 17% minimum.”

In 2025, police overtime costs spiked due to a mass shooting at Annunciation Catholic Church, which left two children dead and 17 others wounded.  

The 2026 budget projections also reflect the fiscal costs imposed on the city by the Trump administration’s Immigration and Customs Enforcement surge there. Operation Metro Surge launched in December 2025 and ran through February, resulting in two protesters encounters with agentsshot to death by federal agents and one death in ICE custody.

“In ’26, definitely the ICE presence required a lot of police presence in the Minneapolis area,” Dye said.

Ahead of the deal, Moody’s Ratings affirmed its Aaa rating and Fitch Ratings affirmed its AAA. They maintain stable outlooks.

Mayor Jacob Frey’s recently released executive budget calls for an 11.3% property tax hike and staffing cuts amid escalating public safety costs.

The city with its GO deal will return to form after trying out an open auction last year, going back to the traditional bid method for this competitive sale.

“We wanted to give (the auction method) a try last year, and it worked out fine,” Dye said. “But there is a cost to that auction method, so we thought, this year we’re going to be a little bit more conservative and just do the traditional bid.”

The municipal advisor on the bond sale is Ehlers and Associates. Bond counsel is Kutak Rock LLP. 

“We are firm on Wednesday,” said Dave Wheeler, director of banking, investments and debt for the city. 

“This is a larger issue than we’ve had in the past,” he said. “It’s by design. We’ve been budgeting and programming additional debt financing for some capital projects for the city’s infrastructure needs. And then part of (the issue) is just some carryover projects that are shovel-ready now, have been authorized in past years and are now ready to go.”

Some of the projects being financed are larger in scale than in the past; the higher figure is also due to increasing materials and labor costs, Wheeler said, even as the total amount of projects being financed remains fairly steady.

Over half of the $269.26 million is levy-funded debt. Enterprise projects secured by the net revenue of the city’s utility systems account for a large portion of the remainder, Wheeler said.

There is also a small assessable portion of the issue, and $36 million will partially refund the city’s Series 2018 bonds, which financed the construction of a public service building and public works storage facility, he said. 

“Our initial projections were around $1.9 million in interest cost savings to the city,” Wheeler said of the refunding.

The bond sale also follows the release of the city’s 2025 annual comprehensive financial report, which shows among other things that the general fund declined $71.6 million last year “as a result of planned use of fund balance and building of public safety staffing.”

Public safety spending increased 18.4%, due mainly to a rise in police and fire department spending driven by personnel costs, the bulk of that from the police department. 

The city’s police overtime costs have been climbing for seven years, the Minneapolis Star-Tribune reported. The chairwoman of the city council’s budget committee told the Star-Tribune police costs are “defunding our city.”

Dye said the mayor’s 2027 budget “budgets appropriately” for police overtime and other public safety costs. 

“It’s so important to budget proactively for those costs that we know are going to happen, like overtime,” she said. “That’s not to say that we’re not making strides in reforming how we’re using overtime… We’re only budgeting about $13 million in the 2027 budget, so we’re trying to build it back up to the levels we need, but not the full ($20 million) amount, knowing that we’re going to make some reforms in that area.” 

The fund balance has also suffered from the evaporation of savings in other areas that had previously offered some counterbalance to soaring public safety costs.

“In prior years, we have relied on vacancy savings quite a bit, and we’re realizing the vacancy savings are no longer available to offset some of these overages that we’re seeing,” Dye said.

Moody’s said the city’s declining fund balance is offset by its financial flexibility and manageable long-term liabilities ratio.

In its August 2025 credit opinion on the city, Moody’s identified higher labor expenses, particularly from police salary increases and efforts to raise police staffing levels, as a challenge. 

It cautioned “a materially weakened financial profile” with an available fund balance ratio near 30%, as well as a long-term liabilities ratio above 250% or a weakening of demographic trends, could lead to a downgrade.

S&P said the city’s reserves are expected to fall below the city’s 17% target. The outlook also reflects “uncertainty regarding the fiscal 2027 recommended budget, pending council approval in December,” the rating agency said.

S&P said in its report on the 2025 GOs that its downside scenario involved the drawing down of the city’s general fund reserves more rapidly than planned.

“The city’s plan to use reserves to plug near-term budget gaps, if not addressed, could be exacerbated by what we see as challenges including the lagging downtown economy and projected national slowdown,” S&P cautioned then. 

Fitch praised the city’s financial resilience and demographic metrics, but warned that declines in general fund reserves “much closer to or below 10% of spending and transfers out” could lead to negative rating action.

“Fitch is closely monitoring the city’s ability to realign its budget after the sharp spending increase in 2025,” the rating agency said.

Fitch also cautioned that demographic and economic metrics deterioration or a significant increase in long-term liabilities could lead to a downgrade.