Minn. cities bracing for higher interest rates

Minnesota cities already struggling to deal with large cuts in state aid now face the possibility of increased borrowing costs because of the downgrade in the federal government's credit rating.

Gary Carlson at the League of Minnesota Cities says the move will likely mean that cities will have to pay higher interest rates when they borrow money.

"At a time when interest rates have been fairly low, and cities have been doing a lot of their capital project needs, this could suddenly potentially force interest rates up and increase borrowing costs for all levels of government," he said.

Cities across the state have been working hard to be financially responsible and keep their own credit ratings high, according to Worthington Mayor Alan Oberloh, the president of the Coalition of Greater Minnesota Cities.

But many have had to adjust their budgets becuase of severe state cuts to Local Government Aid, which for some cities was a large source of income. Now, he says, cities have to deal with another obstacle.

"The tone immediately after the special session in Minnesota was not good because here's comes the hammer -- less [LGA] than you were anticipating getting. Now this on top of that ... none of us are going into this thing with much optimism. It can't do anything favorably for the interest we get on our money," he said.

Oberloh says it's tough to build a responsible city budget with so many unknowns.

Cities that depend on federal funding for housing projects or community development grants could feel the impact first, Carlson says, because the federal government will have to devote more of that money to debt service.