Fitch Affirms Milwaukee Redevelopment Authority, WI Bonds at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA-' rating on the following Milwaukee Redevelopment Authority, WI issues:

--$30.8 million (accreted value) taxable pension funding bonds, 2003 series C;

--$130.9 million taxable pension funding bonds, 2003 series D.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by loan payments from Milwaukee Public Schools (MPS) to the City of Milwaukee (the city). 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

RATING REFLECTS INTERCEPT MECHANISM: These 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 the state of Wisconsin's (the state's) 'AA' GO rating.

STATE AID INTERCEPT: The state aid intercept agreement authorizes and directs the trustee, in case of non-payment by MPS, to intercept scheduled state aid payments sufficient to prevent a default. Fiscal 2014 state equalization aid available for intercept ahead of scheduled debt service payment dates provided strong coverage of projected MADs of series 2003C and 2003D bonds.

RELATIONSHIP BETWEEN MPS AND CITY: While the bonds are not an obligation of the city of Milwaukee, there is a high degree of interconnectedness between the Milwaukee Public Schools and the city, which acts as custodian of MPS' funds.

RATING SENSITIVITIES

CHANGE IN STATE CREDIT QUALITY: An increase in the state's rating could result in an upgrade to these bonds, which carry a rating one notch below the state's 'AA' general obligation 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 rating.

IMPROVEMENT IN CITY'S CREDIT QUALITY: Significant improvement of the city's rating to 'AAA' could cause the rating to be higher than the level indicated by the state aid intercept.

CREDIT PROFILE

STATE AID INTERCEPT MECHANISM

Primary security for the bonds is provided by a state aid intercept mechanism, crafted especially for the bonds. Regardless of whether 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.

Since the state aid amounts are subject to biannual appropriation by the state of Wisconsin (GOs currently rated 'AA', Outlook Stable), a material change in the timing or amount of state equalization aid payments could change the credit profile of the bonds.

STATE OF WISCONSIN CREDIT QUALITY

Wisconsin's 'AA' long-term GO bond rating and Stable Outlook recognize its considerable resources, a diverse economy with an above-average manufacturing presence and a moderate but above-average debt burden.

STATE AID PROVIDES STRONG COVERAGE

MPS receives state equalization aid five times a year, in July, September, December, March and June. The principal payment date for the bonds is April 1, making the March state equalization aid payment the most likely to be intercepted. Total fiscal 2014 state equalization aid proved 23 times (x) coverage of MADS (in 2040). Based on scheduled principal and interest in that year, the March 2014 state equalization aid payment provided strong 5.9x coverage of the April 1, 2040 principal and interest, and 5.6x coverage of full year debt service. The series D bonds are variable rate, index-linked bonds with a maximum rate of 17%; the rate MPS pays is synthetically fixed via three swap agreements with three counterparties (Morgan Stanley, Wells Fargo and PNC).

RELATIONSHIP BETWEEN MPS AND THE CITY

The 2003 series C and D bonds were issued to fund a portion of the MPS unfunded pension liability to the Wisconsin Retirement System. While the bonds are not a general obligation of the city of Milwaukee, the city's credit quality is relevant to the rating, due to the high degree of interconnectedness between MPS and the city.

MPS functions effectively as a department of the city according to state statute, and the city acts as custodian of MPS' funds. This interconnectedness is generally a credit positive; but currently the state aid intercept mechanism provides greater support for the rating.

MPS 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. The school system's service area is coterminous with the city. MPS independently provides elementary and secondary education and independently controls the budget but lacks authority to issue debt directly. The city issues debt on MPS' behalf, including cash flow notes to help smooth MPS' cash flow throughout the year. The city also provides liquidity directly, when needed, for school operations.

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 2013, state aid amounted to 58.1% 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 5.1% of spending in fiscal 2013. Operations are generally structurally balanced each fiscal year with mild general fund net operating deficits after transfers attributable to deposits to the OPEB trust at the end of each fiscal year, for which MPS receives favorable reimbursement from the state.

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

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, IHS Global Insight, National Association of Realtors, and Financial Advisor.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Rating Guidelines for State Credit Enhancement Programs' (April 18, 2013);

--'Fitch Rates Wisconsin's $314MM GO Bonds 'AA', Outlook Stable' (July 30, 2014).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

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

U.S. Local Government Tax-Supported Rating Criteria

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

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Rating Guidelines for State Credit Enhancement Programs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=893134

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Contacts

Fitch Ratings
Primary Analyst:
Arlene Bohner, +1-212-908-0554
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Douglas Offerman, +1-212-908-0889
(State of Wisconsin)
Senior Director
or
Tertiary Analyst:
Bern Fischer, +1-212-908-9167
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Arlene Bohner, +1-212-908-0554
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Douglas Offerman, +1-212-908-0889
(State of Wisconsin)
Senior Director
or
Tertiary Analyst:
Bern Fischer, +1-212-908-9167
Director
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com