NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'AA+' ratings to the following Milwaukee County, WI bonds:
--$25.5 million general obligation (GO) corporate purpose bonds, series 2016A;
--$7.1 million taxable GO mass transit bonds (QECBs - direct payment), series 2016B;
--$3.0 million GO promissory notes, series 2016C;
--$7.4 million GO promissory notes, series 2016D;
--$17.3 million GO refunding bonds, series 2016E.
The series 2016A and 2016B bonds are expected to sell via competition on Oct. 12. Proceeds will fund various capital projects. The 2016C notes, 2016D notes and 2016E bonds are expected to sell via competition on Oct. 27. Proceeds will finance various capital projects and refund outstanding bonds for present value savings.
Fitch has also affirmed the county's Issuer Default Rating (IDR) and the rating on the county's outstanding GO bonds at 'AA+'.
The Rating Outlook is Stable.
The GO bonds and notes are backed by the county's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
KEY RATING DRIVERS
The 'AA+' rating reflects the county's moderate long-term liability burden and very strong gap-closing ability supported by a high level of revenue-raising flexibility and solid expenditure flexibility.
Economic Resource Base
Milwaukee County, as well as its county seat, the city of Milwaukee, serves as the economic engine for the surrounding region and has a fairly diverse economic and employment base, but residents exhibit somewhat below-average wealth and a relatively large proportion is below the poverty level.
Revenue Framework: 'aa' factor assessment
Fitch expects revenue to continue to grow at a rate exceeding inflation, but lagging national GDP. The county retains a substantial level of overall revenue-raising flexibility, despite strict property tax levy limits.
Expenditure Framework: 'aa' factor assessment
Fitch expects the natural pace of spending growth to be in line with to marginally above that of revenues. The county has demonstrated the ability to control expenditures when necessary, aided by a flexible workforce environment. Carrying costs for long-term liabilities are moderate.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is moderate, with overall debt and net pension liability at 11% of personal income.
Operating Performance: 'aa' factor assessment
Very strong financial resilience is a product of the maintenance of reserves both within and outside the general fund, which should allow the county to maintain an adequate level of financial flexibility throughout an economic cycle, given expected moderate levels of revenue volatility and high budgetary flexibility.
Economic Underperformance: A severe economic decline beyond Fitch's expectations for a normal economic decline, could lead to diminished revenue performance and pressure financial operations and the rating.
Reserve Safety Margin: The 'AA+' rating assumes the county will keep aggregate reserves commensurate with the 'aa' financial resilience assessment. Significant diminishment of reserves would weaken Fitch's assessment of the county's financial resilience and could lead to a downgrade.
Milwaukee County is the largest county in the state of Wisconsin, with a population estimated at 957,735 in 2015. The county encompasses a 242-square-mile area adjacent to Lake Michigan, 90 miles north of Chicago. The city of Milwaukee (rated 'AA' with a Stable Outlook), which is the seat of Milwaukee County, accounts for roughly 48% of the county's total assessed valuation and 63% of its population.
Charges for services is the largest source of revenue, providing 41% of general fund revenues, followed by property taxes at 27%, intergovernmental revenue at 22%, and sales taxes at 6%. Much of the charges for services in the general fund relate to state reimbursement of family care costs. A non-profit organization will take over family care responsibilities as of Sept. 1, 2016, which will have the effect of reducing the proportion of general fund revenues that come from charges for services.
Revenue growth has exceeded inflation, but lagged national GDP over the past decade. These trends are likely to continue, given economic fundamentals and recent economic trends. Assessed value has grown modestly over the past three years, as housing values recover from substantial recessionary declines.
The county's independent legal ability to raise revenues is high relative to potential revenue declines in a downturn, stemming from its ability to raise fees and charges as necessary, ability to redirect sales tax revenues currently subsidizing GO debt along with minimal margin beneath the property tax levy limitation.
Health and human services accounts for about 61% of general fund spending, followed by public safety at 16% and general government at 10%.
Fitch expects the natural pace of spending growth to marginally exceed that of revenue growth, requiring active management of expenses. Labor agreements include manageable wage increases and only one small bargaining unit remains unsettled. A two-year miscalculation of pension contribution amounts was identified in mid-2015, leading to a temporary increase in pension contributions as the county amortizes the underpayment over the next three to five years.
The county demonstrated an ability to implement across-the-board cuts quickly during the last recession. Wisconsin's Act 10 affords the county substantial flexibility to manage its labor costs. Fitch expects carrying costs for debt service, pension and other post-employment benefits (OPEB), which were moderate at 15.5% of governmental spending in fiscal 2015, to remain generally stable despite amortization of prior pension cost miscalculation. Pay-go capital spending equivalent to 2.5% of general fund spending provides further indication of expenditure flexibility.
Long-Term Liability Burden
Overlapping debt represents the majority (67.7%) of the long-term liability burden. The Fitch-adjusted net pension liability accounts for 16.8% and net direct debt 15.5% of the long-term liability. Direct debt issuance plans of $40 million-$50 million over the next five years should have minimal effect on overall liability levels, particularly in light of the rapid direct debt repayment of 75.5% in 10 years. A significant portion of the county's direct debt relates to pension obligation notes, issued in 2009 and 2013.
The county provides pension benefits to its employees through single-employer defined benefit plans. The fiscal 2015 combined funded ratio was a reported 82.6%. Based on Fitch's 7% investment return assumption, which is more conservative than the plans' assumptions, Fitch estimates the pension plans to be a combined 75.5% funded. The county has announced plans to reduce its investment rate assumption from the current 8% to 7.75% in 2018 and 7.5% in 2020.
OPEBs are also offered to retirees and their dependents. The county contributed the pay-as-you-go amount of $47.7 million in fiscal 2015. As of January 2014, the OPEB UAAL totaled $973 million or 2.4% of personal income.
The county maintains a small amount of unrestricted general fund reserves, supplemented by a variety of other reserves within and without of the general fund. These combined reserves provide very strong gap-closing capacity given the county's strong revenue and expenditure flexibility and the moderate expected revenue volatility in a downturn. If the county were faced with a revenue decline associated with a normal economic downturn, Fitch believes the county would turn to its expenditure cutting ability to compensate and would maintain reserves throughout the economic cycle commensurate with the 'aa' financial resilience assessment.
The county rebuilt reserves rapidly during the current recovery period with little to no deferrals or use of non-recurring support of operations. Modest general fund net operating surpluses in the last six years have nevertheless left the fiscal 2015 unrestricted general fund balance at a slender 0.3% of spending. When other available resources are included, the reserve cushion rises to 8.3% of spending.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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