Fitch Rates Milwaukee County, WI GO's 'AA+'; Outlook Stable

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned an 'AA+' rating to the following Milwaukee County, Wisconsin (the county) bonds:

--Approximately $101.2 million taxable general obligation pension refunding bonds, series 2013B;

--Approximately $32.5 million general obligation corporate purpose bonds, series 2013A.

The proceeds of the series 2013B bonds will be used to make direct purchase(s) of the 2024 term maturity of the series 2009A notes from one or more willing sellers, and to pay the cost of issuing the bonds. The series 2013B bonds are expected to sell via negotiation the week of June 19th. The series 2013A bonds will fund capital projects are expected to sell via competitive sale on July 10th.

Fitch has also affirmed the following Milwaukee County ratings:

--Approximately $791.3 million unlimited tax general obligation bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The GO bonds are secured by the county's full faith and credit and its ad valorem tax, without limitation as to rate or amount.

KEY RATING DRIVERS

FLEXIBILITY DESPITE NARROW MARGINS: Conservative budgeting and careful expenditure control have allowed for consistently balanced operations most years, despite adverse economic conditions and statutory requirements to appropriate surplus. The county retains considerable margins of flexibility despite stricter revenue raising constraints imposed by the state.

REGIONAL ECONOMIC ENGINE: Milwaukee County serves as the economic engine for the surrounding region although post-recession recovery has been slow.

BELOW AVERAGE SOCIOECONOMIC INDICATORS: Per capita income levels are below average, as is market value per capita. The unemployment rate remains somewhat elevated, typical of areas historically dependent upon manufacturing.

MANAGEABLE LONG-TERM LIABILITIES: The overall debt burden is above average but manageable, future capital needs are limited, and principal amortization is rapid. Pensions are adequately funded, in large part through the issuance of pension obligation bonds.

CREDIT PROFILE

Milwaukee County serves as the regional economic and cultural center for south eastern Wisconsin. The city of Milwaukee (rated 'AA' with a Stable Outlook by Fitch), which is the county seat of Milwaukee County, accounts for roughly 48% of the county's total assessed valuation and 63% of its population.

FLEXIBILITY DESPITE NARROW MARGINS

The county's financial operations are characterized by stable operating results and modest general fund balances, in the range of 4-5% of spending. Tax levy limits have been in effect since 2005. The county operates under limitations to revenue raising and to maintenance of fund balances; however, considerable fiscal flexibility is provided by the county's ability to reduce spending or redirect expiring levies for maturing debt, among other sources.

The Stable Outlook assumes management continues to achieve consistently balanced results within existing constraints. However, future economic or revenue underperformance or a narrowing of operating flexibility could negatively affect the credit.

The fiscal 2013 budget raises the property tax levy by a modest $3.9 million. Under current restrictions, the county could raise the property tax by another projected $8 million in fiscal 2014. Additionally, if the county chose to levy for unlimited tax bond debt service currently supported by sales tax revenues, it could seek approval from the state to free up a corresponding portion of sales tax revenues for operations, which would allow it to increase the property tax levy by up to $60 million. Liquidity is adequate across funds and no cash flow borrowing is required.

POSITIVE FISCAL TREND DESPITE RESTRICTIONS

The county has recorded nominal general fund operating surpluses after transfers in four of the past five years despite adverse economic conditions and revenue-raising constraints, underscoring the county's solid management profile.

Fiscal 2011 general fund results generated a higher than usual net surplus of $14.8 million, or 1.4% of spending, despite the budgeted appropriation of $4.1 million of general fund balance. The positive variance was largely the result of cost containment measures, as revenues underperformed budget for the year. Expenditure side savings included the introduction of employee contributions for pension and health care, slow filling of vacant positions, limitation of overtime and lower road maintenance costs due to a mild winter.

The county's revenue streams are diverse with charges for service accounting for 37% of total general fund revenues, followed by intergovernmental revenue at 26%, property tax at 26%, and sales tax revenue at 6%. The county ended 2011 with an improved but still slim 5.7% total general fund balance, somewhat higher than the 4.0 to 4.5% range recorded in recent years. Given the small financial cushion, the county's ability to successfully achieve balanced operations will continue to be crucial to ratings stability.

The adopted 2012 budget included a $5.8 million (2.2%) property tax increase, a $1.55 million budgeted contingency reserve, and a de minimus amount of appropriated general fund balance. Preliminary, unaudited 2012 results show a general fund operating surplus (before transfers) of approximately $23 million. The favorable results reflect transit-related savings, health care savings and better-than-budget sales tax receipts. In accordance with statutory requirements to appropriate surplus fund balance, the county plans to transfer $18 million of the operating surplus to its debt service reserve. The remaining $5 million will be restricted within the general fund, to be appropriated in the fiscal 2014 budget.

The adopted fiscal 2013 budget includes a $3.9 million increase in the property tax levy, appropriates $5.5 million of general fund balance (representing a portion of the 2011 surplus), and includes a $4 million budgeted contingency reserve.

BELOW AVERAGE SOCIO-ECONOMIC INDICATORS

Wealth levels are below average, largely reflective of the county's urban core. Per capita income is 88% of the state, and 86% of the national levels. Housing values remain under pressure, contributing to the decline in assessed value; 2012-13 assessed value represented a 15.3% drop since the peak in 2009-10. The April 2013 unemployment rate of 8.3% represented a minor improvement over the 8.4% recorded one year prior, the result of modest jobs gains slightly outpacing growth in the labor force. The April rate is now above both the national rate of 7.1%, and the state rate of 7.2%.

MANAGEABLE LONG TERM OBLIGATIONS

The aggregate debt burden is elevated at 6.2% of full market value but more moderate at $3,749 per capita. A significant portion of the debt burden is attributable to the pension obligation debt, and represents the exchange of one type of long term obligation (unfunded pension liability) for another (bonded debt); without pension borrowing, the debt burden would be 5.5%. Principal amortization is rapid with 71.4% repaid in 10 years. The refunding transaction is designed to generate present value savings while shortening the overall maturity of the debt by one year.

Debt service accounted for a manageable 9.5% of fiscal 2011 general fund expenditures, and should remain affordable as the county retires principal in greater amounts than it issues. The county's five-year capital improvement plan to be debt financed totals roughly $108 million, which is less than half the principal retired over same period.

Milwaukee County's long-term liabilities related to employment benefits are mixed. The county provides pension benefits to its employees through single employer defined benefit plans. As of January 2012, the unfunded actuarial accrued liability (UAAL) totaled $314 million or a modest 0.5% of full market value.

Based on Fitch's more conservative 7% investment return assumption, the pension plans are estimated to be 79% funded. The 79% funded ratio is considered adequately capitalized; however the ratio was bolstered by $400 million in pension bonds in 2009 to augment pension assets.

Other post-employment benefits (OPEB) are also offered to retirees and their dependents. The county contributed $58.2 million, which equaled the pay-as-you-go amount, in 2011. As of January 2011, the UAAL totaled $1.5 billion or a meaningful 2.4% of full market value. Recently implemented healthcare plan design changes for non-represented employees and retirees are expected to reduce the OPEB liability by $230 million or approximately 15%.

The combined pension and OPEB and debt service payments equaled a reasonable 17.9% of governmental fund expenditures and transfers out (net of capital projects), including amounts contributed in excess of the ARC.

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 (Public Financial Management).

Applicable Criteria and Related Research:

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

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

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793729

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Contact:
Fitch Ratings
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Arlene Bohner, +1-212-908-0554
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Committee Chairperson
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Senior Director
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