NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned ratings to the following Milwaukee, Wisconsin (the city) securities:
--$90 million revenue anticipation notes (RANs), series 2016 R1 'F1+';
--$127.74 million general obligation (GO) promissory notes, series 2016 N2 'AA';
--$38.02 million GO corporate purpose bonds, series 2016 B3 'AA';
--$27.53 million taxable GO corporate purpose bonds, series 2016 T4 'AA'.
Additionally, Fitch has affirmed Milwaukee's Issuer Default Rating (IDR) as well as the ratings on various Milwaukee unlimited tax general obligation (ULTGO) bonds at 'AA' and Milwaukee Redevelopment Authority bonds at 'AA-'. A full list of the affirmed bonds follows at the end of this release.
The RANs will finance the city's operating budget on an interim basis in anticipation of the receipt of state shared revenue payments. The N2 notes and B3 and T4 bonds will finance various public improvements and fiscal requirements of the city and refund outstanding commercial paper and other debt of the city. The RANs, bonds and notes are expected to sell via competition on May 5.
The Rating Outlook is Stable.
SECURITY
The GO bonds and notes are general obligations of the city, payable from taxes levied on all taxable property within the city, without limitation as to rate or amount. The RANs are limited obligations of the city payable from state aid payments and also from certain other general fund revenues. Redevelopment Authority lease bonds are secured by loan payments from Milwaukee Public Schools (MPS) to Milwaukee. The city is directed to use any money in the School Operating Fund to make the payment to the trustee if the payment is not made by MPS. If payments are not made to the trustee, the trustee is directed to intercept state aid payments.
KEY RATING DRIVERS
Analytical Conclusion: The 'AA' rating reflects the city's stable financial performance over time, strong gap-closing capacity, and moderate long-term liabilities levels. A demonstrated capacity to cut spending and sufficient financial cushion offset Fitch's expectation for limited revenue growth.
Economic Resource Base: Milwaukee serves as the economic engine for the surrounding region and has a fairly diverse economic and employment base, but residents exhibit below-average wealth and a relatively large proportion are below the poverty level. The local economy maintains a reduced but still above-average reliance upon manufacturing that in the past has created vulnerabilities to recessionary employment shifts.
Revenue Framework: 'a' factor assessment
Fitch expects the city's two largest sources of revenue, state aid and property taxes, to remain stagnant or grow slightly below the level of inflation. The city's independent legal ability to raise revenues is fairly constrained by state law but provides sufficient flexibility given the city's limited vulnerability to economic downturns.
Expenditure Framework: 'aa' factor assessment
The city has demonstrated the ability to control expenditures and operates within a fairly flexible labor environment. Carrying costs for long-term liabilities claim a moderate proportion of the governmental fund spending. On average, the natural pace of spending growth is likely to be above revenue growth over time.
Long-Term Liability Burden: 'aa' factor assessment
The city participates in a well-funded pension plan. Debt position and future capital needs are manageable despite substantial borrowing for school purposes, and debt is rapidly repaid.
Operating Performance: 'aaa' factor assessment
The stability of the city's revenue streams makes the city less vulnerable to decline in economic downturns. While reserves are nominally modest, they represent a sufficient safety margin given the limited vulnerability to economic cycles and adequate budgetary flexibility and control.
RATING SENSITIVITIES
For the city's ratings:
Revenue Volatility: The 'AA' rating assumes a continued low level of revenue volatility. Increased volatility could change Fitch's assessment of the adequacy of reserves and lead to a downgrade.
Economic Improvement: A fundamental change in the city's economy that strengthens growth prospects for revenues could result in an upgrade to the city's GO rating.
Long-term Rating: Short-term debt ratings are related to those of long-term obligations; a lowering of the city's GO rating below 'AA-', though not presently anticipated, could result in a downgrade in the RAN rating.
For the redevelopment authority rating:
Change in State Rating: An upgrade in the state's rating could result in an upgrade to the redevelopment authority bonds, which carry a rating one-notch below the state's 'AA' GO bond rating. Conversely, a decrease in the state's rating could result in a downgrade.
Change in School Funding Landscape: Although not anticipated, a notable shift in the level or timing of state funding for school districts could negatively affect the redevelopment authority bond rating.
Improvement in City's Rating: Significant improvement in the city's rating could cause the redevelopment authority rating to be higher than the level indicated by the state aid intercept.
CREDIT PROFILE
Milwaukee is the largest city in the state of Wisconsin, encompassing 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.
Revenue Framework
The city remains dependent on state shared revenue for approximately 40% of its general fund revenues, making its finances somewhat vulnerable to the state's fiscal condition (Wisconsin GOs are rated 'AA'/Stable Outlook). The significant progress made by the state toward structural budgetary balance lessens concerns regarding the likelihood of future large cuts in aid to the city. The city's second largest source of revenue (26%) is its property tax.
The historical revenue growth trend has been marginally positive on a nominal basis, but has not kept pace with inflation. Milwaukee is a well-developed urban center, so expectations for future growth are largely redevelopment-related. While only continued sluggish revenue growth can be expected, the revenue stream is not particularly vulnerable to decline in economic downturns.
Wisconsin municipalities are subject to statutory property tax revenue raising limitations which allow for growth in the operating levy only for net new construction added to the tax base. The city maintains a modest margin beneath its limit and also retains the ability to raise fees and charges. These amounts are sufficient to address the potential revenue decline identified in Fitch's stress scenario.
Expenditure Framework
Public safety is the city's largest responsibility (43% of total spending), with the bulk of spending going to personnel costs. The pace of spending growth absent policy actions is likely to be modest given the expected slow-growth environment.
Milwaukee's fixed cost burden is moderate, with carrying costs for debt, pensions and OPEB equaling 17% of governmental expenditures. The 2011 Wisconsin Act 10 enhances the city's ability to control spending by restricting collective bargaining rights of public employees and granting public employers significant flexibility over labor costs for non-public-safety workers. Recent health plan design changes and increased pension contributions from employees have limited growth in benefit and retirement costs.
Long-Term Liability Burden
Debt and pension burden is moderate. A moderate proportion of debt is currently in variable-rate mode, although this may increase up to the city's target level of 15%-25% of property-tax supported debt. Amortization is rapid, despite modest use of capital appreciation bonds. The city maintains a public debt amortization fund ($61.9 million in 2014) which is governed by state statute and the city commission. The city may use up to 40% of the balance to retire debt but typically appropriates an amount approximating investment earnings for this purpose.
The pension plans in which the city participates exhibit strong asset-to-liability ratios, even when adjusted by Fitch to reflect a lower investment rate of return. The annual pension payment consistently meets actuarially-determined requirements. The city also records a large OPEB liability.
Operating Performance
Milwaukee's revenue history exhibits stability leading to favorable stress scenario results. The city operates under a framework that inhibits its ability to accumulate general fund balance. Operating surpluses are required to be reserved and budgeted for in future fiscal years. It is reasonable to expect that the city may experience occasional net operating deficits in years when officials are appropriating larger amounts of prior year surpluses. However, the reliability and stability of the revenue stream, the strength of budgetary oversight and the high level of budgetary flexibility lead Fitch to expect that the city will continue to maintain reserve levels at or above the level which Fitch views as appropriate for the rating level.
Budgetary oversight and control is strong. The city has demonstrated its willingness and ability to limit expenditures to maintain budget targets. Despite adding approximately 100 police personnel in fiscal 2014 and 14 other additions in fiscal 2015, current staffing remains more than 400 full time equivalents (6%) fewer than four years ago.
Strong Short-term Credit Factors
The 'F1+' rating on the RANs reflects the city's 'AA' long-term rating, as well as the adequate repayment structure. The projected cash flow safety margin is adequate, reflecting a projected ending cash balance at 14.4% of total receipts. Coverage is strong, with projected available cash at note maturity covering the note repayment by 2.5x. These metrics are similar to the historical 2015 cash flow safety margin of 15.1% and coverage of 2.2x.
Redevelopment Authority Rating Reflects Intercept Mechanism
The redevelopment authority bonds carry a rating equal to the higher of the state aid intercept rating or two notches below the city's 'AA' GO rating. Currently, the higher of these is the state-aid intercept mechanism, which Fitch rates one notch below Wisconsin's 'AA' GO rating.
Primary security for the redevelopment authority bonds is provided by the state aid intercept mechanism, crafted especially for the bonds. This agreement authorizes and directs the trustee, in case of non-payment by MPS, to intercept scheduled state aid payments sufficient to prevent a default. Regardless of whether Milwaukee Public Schools (MPS) has appropriated the loan payment or not, the city makes the loan payments on Jan. 1 and Aug. 1 from money on deposit in the school operations fund.
If 45 days prior to the scheduled state aid disbursement dates which immediately precede the debt service payment dates, the required money is not on deposit, the trustee will notify MPS, the state Department of Public Instruction (DPI) and the state Department of Administration (DOA) of the deficiency. DPI will then divert that amount to the trustee, on the next regularly scheduled state aid payment date, to avoid a payment default on the bonds.
Fiscal 2015 state equalization aid available for intercept ahead of scheduled debt service payment dates provided strong 10.5x coverage of projected maximum annual debt service of series 2003C and 2003D bonds. Since the state aid amounts are subject to biannual appropriation by the state, a material change in the timing or amount of state equalization aid payments could change the credit profile of the bonds.
Fitch affirms the following city of Milwaukee, WI ratings at 'AA' or as indicated:
--99.4 million general obligation (GO) promissory notes, series 2015 N2?
--$27.6 million GO corporate purpose bonds, series 2015 B3?
--$20.2 million taxable GO corporate purpose bonds, series 2015 T4;
$37.3 million GO corporate purpose bonds (taxable qualified school construction bonds direct payment) series 2010 M6?
--$8 million GO corporate purpose bonds (taxable) series 2010 T3?
--$32.1 million GO corporate purpose bonds (taxable) series 2011 T5?
--$12.1 million GO promissory (taxable) notes series 2003M10?
--$19.1 million GO corporate purpose bonds series 2006 B10?
--$7.1 million GO corporate purpose bonds series 2007 B5?
--$6.9 million GO corporate purpose bonds series 2008 B7?
--$12 million GO corporate purpose bonds series 2009 M6 (qualified school construction bonds tax credit)?
--$38.4 million GO corporate purpose bonds series 2010 B5?
--$28.9 million GO corporate purpose bonds series 2011 B4?
--$4.5 million GO promissory (taxable) notes series 2010 T2?
--$1.9 million GO promissory notes series 2007 N4?
--$3.2 million GO promissory notes series 2008 N6?
--$17.6 million GO promissory notes series 2009 N1?
--$43.9 million GO promissory notes series 2010 N1?
--$42.9 million GO promissory notes series 2011 N3?
--$1 million GO refunding bonds series 2001A?
--$8.2 million GO refunding bonds series 2002A?
--$17.5 million GO refunding bonds series 2009 B2;
--$80 million school revenue anticipation note, series 2015 M7 at 'F1+';
--$161.7 million (current accreted value) Milwaukee Redevelopment Authority pension funding (taxable) bonds, series 2003C and 2003D at 'AA-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003349
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003349
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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