Fitch Rates Milwaukee, WI's School RANs 'F1+'

NEW YORK--()--Fitch Ratings has assigned a Short-term rating of 'F1+' to $180 million Milwaukee, Wisconsin (the city) school revenue anticipation notes (RANs) series 2015 M7.

The RANs are expected to sell via competitive sale on Oct. 1. Proceeds will be used for school cash flow purposes.

SECURITY

Note principal repayment is secured by an irrevocable pledge of all school operations fund revenues for the 2015-16 fiscal year that are due and not yet paid to the city or otherwise pledged or applied through June 30, 2016. Note interest repayment is secured by a pledge of surplus revenues of the debt service fund of the city.

KEY RATING DRIVERS

RELATIONSHIP TO CITY RATING: While the notes are not general obligations of the city, Fitch believes the city's management of the Milwaukee Public Schools' (MPS) funds and provider of liquidity create a relationship that supports the highest long-term rating on the notes. MPS effectively functions as a department of the city (GOs rated 'AA') according to state statute.

SUFFICIENT, TIMELY STATE AID: Although all available school operating revenue through fiscal 2016 is pledged to note repayment, the authorizing resolution directs city officials to segregate principal due from the December 2015 and June 2016 state aid payments. Fitch expects a satisfactory level of additional resources would be available to make the repayment in the event of reduced or delayed state aid. Interest on the RANs is additionally secured by surplus revenues of the city's debt service fund. The city historically has had adequate financial resources to cover note interest if needed.

REGIONAL ECONOMIC CENTER: Milwaukee serves as the economic engine and employment center for the surrounding region. The city's economy continues to suffer the effects of the recession but has begun to show signs of recovery.

RESTRICTIVE REVENUE ENVIRONMENT: Milwaukee's financial challenges are underscored by the extremely limited revenue-raising environment for Wisconsin municipalities. The city's largest source of operating revenues (state-shared revenue) has been stagnant and only very limited increases in the property tax levy are allowable under state law.

STRONG BUDGETARY CONTROL: The city consistently outperforms its budget, which typically includes appropriation of reserves. Reserve levels tend to fluctuate, but minimal core levels are maintained according to policy.

POSITIVE LONG-TERM LIABILITY PROFILE: Aggregate debt levels are moderate and principal amortization is quite rapid. Long-term obligations are manageable and pensions are well-funded.

RATING SENSITIVITIES

LONG-TERM RATING: The rating on the notes is sensitive to changes in the city's long-term credit fundamentals. A change in the city's GO rating could result in a downgrade of the note rating. The Stable Outlook on the city's GO rating reflects Fitch's expectation that such a change is unlikely.

CHANGE IN SCHOOL FUNDING LANDSCAPE: Although not anticipated, a notable shift in the level or timing of state funding for school districts could affect the short-term rating.

CREDIT PROFILE

Milwaukee, the largest city in the state of Wisconsin, encompasses a 97 square mile area located adjacent to Lake Michigan, 90 miles north of Chicago. The city's population of nearly 600,000 has shown stability or marginal growth since the 2000 census, reversing a multi-decade trend of decline. The school system's service area is coterminous with the city.

MPS functions effectively as a department of the city according to state statute, and the city acts as custodian of MPS' funds. It is governed by the Milwaukee Board of School Directors (MBSD), and the city levies and collects the taxes necessary to support the separately adopted MBSD budget. MPS independently provides elementary and secondary education and independently controls the budget but lacks authority to issue debt directly. The city issues on MPS's behalf, including short-term notes to help smooth MPS's cash flow throughout the year. The city also provides liquidity directly, when needed, for school operations.

SUFFICIENT, TIMELY STATE AID FOR RAN REPAYMENT

State equalization aid, which is primarily derived from state income taxes, is generally unrestricted financial assistance to school districts to fund a broad range of expenditures. The aid in any fiscal year is computed using the prior fiscal year's enrollment and equalized property valuations. The state distributes school aid five times a year based on an allocation formula and last year MPS received 15% of total state aid in September, 24% in December, 25% in March, 34% in June and 2% in July. Pursuant to a city resolution, the city treasurer will segregate the June state aid payment to pay principal of the RANs.

Note repayment is due on December 30 2015, (28 of principal) and June 30, 2016 (72%). The projected state equalization aid in December 2015 and June 2016 are projected to cover principal note repayments by 2.50x and 1.34x, respectively. The city has demonstrated willingness and ability to provide operating cash flow support to MPS at multiple points throughout the fiscal year. Fitch expects the city to continue to provide strong liquidity support to MPS in fiscal 2016 and beyond.

NARROWLY BALANCED MPS FINANCES

Similar to many urban school districts in the U.S., MPS is challenged in recent years to provide educational services to a largely disadvantaged student population in an environment of declining-to-stagnant state aid, waning enrollment, and a contracting tax base. Long-term conditions improved somewhat in the most recent year, with stabilization evident in enrollment, state aid and the tax base. State equalization aid accounts for a high but declining proportion of MPS revenues. In fiscal year 2014, state aid amounted to 59% of general fund expenditures, down from 64% in FY2008.

MPS operates in a tight financial environment, managing to a fairly narrow unreserved general fund balance reserve, equivalent to 4.8% of spending in fiscal 2014. Operations are generally structurally balanced each fiscal year with mild general fund net operating deficits after tranfers attributable to deposits to the OPEB trust at the end of each fiscal year, for which the district receives favorable reimbursement from the state.

For more detail regarding the city's long-term general obligation rating, please see 'Fitch Affirms Milwaukee, WI's ULTGOs at 'AA'; Outlook Stable' (May 2015).

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria.

If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index and IHS Global Insight.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990897

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990897

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer
Director
+1-212-908-9167
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Committee Chairperson
or
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bernhard Fischer
Director
+1-212-908-9167
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Committee Chairperson
or
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com