Fitch Rates Milwaukee, WI GOs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned 'AA' general obligation (GO) ratings to the following Milwaukee, Wisconsin (the city) securities:

--$27 million GO promissory notes, series 2016 N5;

--$12 million GO corporate purpose bonds, series 2016 B6.

The notes and bonds will finance various public improvements related to a new basketball arena project for the Milwaukee Bucks. The bonds and notes are expected to sell via competitive sale on June 9.

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.

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

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.

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.

Date of relevant rating committee: April 25, 2016.

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.

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005244

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160527005517/en/

Fitch Ratings
Primary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Wong
Director
+1-212-908-0500
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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