One of the three agencies that ascertains Minneapolis’ credit rating, Moody’s Investors Service, dropped the city’s rating from Aaa to Aa1 Monday, citing a nearly $70 million deficit in the city’s internal service funds.

Standard and Poor’s Corp. retained Minneapolis’ Aaa credit rating, and the third agency, Fitch, is expected to do the same, said city finance director Patrick Born.

The rating drop means the bonds Minneapolis sells to corporations to fund its projects will carry a slightly higher interest rate, which Born said is negligible.

“If we can even measure the impact … it would be somewhere between no impact and as much as two one-hundredths of a percent at the rate at which we issue bonds,” he said.

Sixth Ward Council Member Jim Niland said when bond interest rates go up, taxpayers will have to pay the difference.

“The loss of that bond rating point is definitely going to cost the taxpayers of Minneapolis money in the future,” Niland said.

The city will know the exact cost Aug. 8, when it will sell its first bonds under the new credit rating.

Moody’s analyst Dianne Golub said the debt is coming from the three largest internal service funds – self-insurance, intergovernmental services and permanent improvement equipment services.

The funds, which make up about 13 percent of Minneapolis’ spending, have incurred debt significantly more than the total reserves of the city’s general fund.

The cost of balancing the internal service funds’ deficit could be passed on to citizens in the form of higher taxes unless the City Council makes cuts in department services.

First Ward Council Member Paul Ostrow said he hopes the rating drop will push the council into being “extremely careful with (city) dollars in the years ahead.”

“The same things the rating agencies are concerned about are things the people we represent should be concerned about,” he said.

Niland said city subsidies for projects such as the Target store on Nicollet Mall contribute to debt.

“If we’d used those resources for things that make sense – like making sure the city’s financial health is in order – instead of handing out huge gobs of corporate welfare, we could have avoided this,” he said.

But Ward 2 Council Member Joan Campbell said the increase in bond interest is minuscule and touted S&P’s renewal of the city’s Aaa rating.

Campbell said the investments were all necessary; what was lacking were comprehensive financing plans.

“When it comes time to authorize the budget, which pays for the debt services on these things, my colleagues vote ‘no,'” Campbell said.

However, she added, “If we didn’t make these investments, it would be like having a huge savings account and not fixing the leaky roof.”

Finance plans are in place to balance two of the three problem funds, and a plan will be designed for the third by the end of this year, Born said.

The plans outlined will balance the funds by 2002 and 2003, but negative cash balance won’t be achieved until 2006 or 2008.

Thirteenth Ward Council Member Barret Lane, as well as council members Ostrow and Niland, said the possibility of a dip in the city’s credit rating has often been discussed – including warnings from the city’s previous finance director, John Moir – but that signs were largely ignored.

“I was warning people in writing a year ago,” Lane said. “I think this is completely predictable.”