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Fitch Downgrades Milwaukee, Wisconsin's ULTGOs to 'AA'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded various unlimited tax general obligation (ULTGO) bonds for Milwaukee, Wisconsin (the city) to 'AA' from 'AA+'. See below for listing of affected series rated by Fitch. Fitch has also revised the city's Rating Outlook to Stable from Negative.

Fitch Ratings has withdrawn the 'AA' rating on the Milwaukee (WI) general obligation promissory (taxable) notes series 2003-M11 as the bond was not sold.

SECURITY

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

KEY RATING DRIVERS

DOWNGRADE CONSIDERATIONS: The one-notch rating downgrade reflects the city's highly restrictive revenue environment, lingering economic stress and reserve levels that are below-average for the rating category.

RESTRICTIVE REVENUE ENVIRONMENT: The city's financial challenges are underscored by the extremely limited revenue environment for Wisconsin municipalities. The city's largest source of operating revenues (state-shared revenue) has been stagnant and only very limited increases in the property tax levy are allowable under new state law.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER: The city serves as the economic engine for the surrounding region; while the greater Milwaukee area has seen a measure of economic recovery, the city center exhibits persistent economic stress.

SUBSTANDARD SOCIOECONOMIC INDICATORS: Wealth indicators for city residents are below average and unemployment rates are well above average.

POSITIVE DEBT PROFILE: Aggregate debt levels are moderate and principal amortization is rapid. Long-term obligations are manageable and pensions are well-funded.

CREDIT PROFILE

RESTRICTED REVENUE ENVIRONMENT

The city remains dependent on state shared revenue for nearly 40% of its general fund revenues. This has made its finances vulnerable to the state's fiscal condition (Wisconsin GOs are rated 'AA' with a Stable Outlook by Fitch). The state's 2011-13 biennial budget included substantial cuts in local aid to municipalities, including a $10 million year-over-year reduction in shared revenue to the city in fiscal-year 2012 (FY'12). State shared revenue to the city is estimated to rise slightly in FY'13, based upon state department of revenue projections. The recent significant progress made by the state toward structural budgetary balance lessens concerns regarding the likelihood of future large cuts in aid to the city.

In 2011, the state passed legislation (Act 10) which severely restricted collective bargaining rights of public employees and granted public employers significant flexibility over labor costs for non-public safety workers. Two recent lower court decisions have struck down many of the provisions contained in Act 10. However, the first decision has been stayed pending appeal. Additionally, the state attorney general has requested a stay of the second, pending appeal.

Whether or not these decisions are ultimately upheld or overturned, Fitch believes the city will continue to benefit from a key Act 10 provision which was not affected by either ruling. The elimination of binding arbitration in favor of a mediation procedure that imposes the employer's final and best offer. This should help the city control labor costs in the near-term, as several labor agreements are currently open.

LIMITED RESERVES UNDERSCORE THE IMPORTANCE OF CONSISTENT OPERATING RESULTS

The city maintains general fund reserves in amounts inconsistent with those of similarly rated large cities. State law requires any operating surplus be applied to the next year's budget, or restricted for future year's budgets. Lower levels of general fund reserves highlight the necessity for year-to-year financial consistency, which hinges on the city's ability to generate surplus equal to or greater than the amount applied in a given year.

The city drew on general fund balance in amounts larger than the surplus returned during FYs 2006 through 2010. This has reduced the total general fund balance from a pre-recession 15% of spending in 2007 to 8.9% of spending in 2010. The trend reversed in fiscal 2011, when expenditure cuts offset the stagnant revenue environment and allowed a $12.4 million general fund operating surplus (net of transfers, applied surplus, and cash flow borrowing) equal to 1.9% of spending. This brought FY'11 total general fund balance up to 11.3% of spending (still below average at 8.9% on an unrestricted basis).

The $67.3 million reserve in the public debt amortization fund, equivalent to another 10.5% of general fund spending, augments financial flexibility. The permitted use of this reserve is generally limited to debt service payments, purchase and cancellation of outstanding debt; however, it does represent a significant alternate source of liquidity for bondholders.

The 2012 budget, which is balanced with the use of $13.7 million in general fund tax stabilization fund reserves, includes a $9.9 million decline in state shared revenues. The city offset revenue declines primarily with a healthcare cost modification that shifted roughly $28 million in healthcare costs away from the city compared to the year prior.

The 2012 budget also contemplates the implementation of new service charges and additional cost efficiencies. Management projects it will realize $14-$15 million in expenditure savings, primarily through the realization of additional health care plan structure changes and tightened vacancy monitoring. This should offset the appropriated amount. Fitch believes that it may be challenging for the city to fully realize all of these savings, given persistent economic headwinds.

The proposed fiscal 2013 budget includes funding for 81 fewer general city full-time equivalents compared with the 2012 adopted budget, and sets a property tax levy increase of $2.4 million or less than 1%. Proposed budget revenues rely upon an appropriation of $13.9 million from the general fund tax stabilization reserve and $18.5 million from the pension reserve. This contains funds deposited by the city in years when no actuarially required contribution was necessary due to over-funding of the pension system.

In addition, the proposed budget calls for various fee increases of $4.4 million, which have not yet been enacted by the common council. Should the revenue from these new fees not be realized, additional withdrawals from the general fund tax stabilization fund would be required, making it more likely that city may end the year with lower general fund balance reserves.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER

Milwaukee, the largest city in the state of Wisconsin, encompasses a 97 square mile area located adjacent to Lake Michigan, 90 miles north of Chicago. The city serves as the economic engine for the surrounding region and has a fairly diverse economic and employment base, despite lingering economic stress. The local economy maintains an above-average reliance upon manufacturing, although the sector's share of total employment has declined markedly from pre-recession levels.

The city's unemployment rate remains elevated at a seasonally unadjusted rate of 11.4% in July. This is well in excess of the state and national rates of 7.4% and 8.6%, respectively. The rate of 11.4% represents an improvement from the 11.7% recorded in July 2011, but this is largely due to the losses in the labor force exceeding the losses in employment. In contrast, the unemployment profile for the Combined Statistical Area (CSA), representing Milwaukee-Waukesha-West Allis, is materially stronger with a July 2012 unemployment rate of 8.3%.

SUBSTANDARD SOCIOECONOMIC INDICATORS

Socioeconomic indicators are substandard with per capita income levels at 71% of the state-wide average and individual poverty rates more than double the state. Education levels are also below average, with 21% of the adult population achieving higher education versus 28% nationally. Market value has declined in each of the last three years, falling an aggregate 13.3% since the peak in 2009, and further declines are likely.

MANAGEABLE LONG TERM OBLIGATIONS

Overall debt ratios are moderate at $2,565 per capita and above average at 5.5% of market value. Principal amortization is rapid with 83.3% of principal scheduled for repayment within ten years. Maximum annual debt service as a percentage of 2011 general fund spending is above average at 15.3%; however, this concern is mitigated by the rapid amortization and payment of a portion of debt service from revenues derived outside the general fund.

Additionally, the $67.3 million balance in the public debt amortization fund moderates the city's debt load and boosts financial flexibility.

The city's long-term liabilities related to employment benefits are generally positive. The city's pension plan is 96.0% funded on an actuarial basis, assuming an 8.5% rate of return, or 82.4% funded when adjusted by Fitch to reflect a 7% rate of return. In 2010 and 2011, the plan was fully funded on an actuarial basis, and no contribution was required. The city prudently deposited $44 million into a pension reserve in both of those years. The city is also working with an actuary to implement policies to ensure level payments are made, even in those years when the plan is over-funded on an actuarial basis, when projections show funded status may decline.

The city plans to draw $18.5 million from the pension reserve in 2013 to smooth the payment requirement. The remainder of the reserve will be used for payment smoothing in future years until the actuarially derived smoothed payment level is achieved.

The city also provides other post-employment benefits (OPEB), which the city provides on a pay-as-you-go basis. Milwaukee paid $34.5 million for OPEB in 2011, which equaled 3.4% of operating fund expenditures. As of Jan. 1, 2012, the city's unfunded OPEB liability totaled $916.4 billion or 3.3% of tax base market value.

ULTGO bonds downgraded by Fitch to 'AA' from 'AA+' include the following:

--$10.6 million GO corporate bonds series 2003 B6;

--$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;

--$33.5 million GO corporate purpose bonds (taxable) series 2011 T5;

--$8.6 million GO corporate purpose bonds series 2003 B1;

--$24.2 million GO corporate purpose bonds series 2004 B1;

--$16.6 million GO corporate purpose bonds series 2005 B10;

--$13.8 million GO corporate purpose bonds series 2005 B2;

--$19.1 million GO corporate purpose bonds series 2006 B10;

--$25.5 million GO corporate purpose bonds series 2006 B2;

--$7.1 million GO corporate purpose bonds series 2007 B5;

--$7 million GO corporate purpose bonds series 2008 B7;

--$12 million GO corporate purpose bonds series 2009 M6 (qualified school construction bonds - tax credit);

--$42.4 million GO corporate purpose bonds series 2010 B5;

--$28.9 million GO corporate purpose bonds series 2011 B4;

--$7.8 million GO promissory (taxable) notes series 2010 T2;

--GO promissory (taxable notes) series 2003 M10;

--$0.5 million GO promissory notes series 2003 N7;

--$7.9 million GO promissory notes series 2005 N9;

--$28 million GO promissory notes series 2006 N1;

--$12.8 million GO promissory notes series 2006 N9;

--$9.8 million GO promissory notes series 2007 N4;

--$11.1 million GO promissory notes series 2008 N6;

--$44.1 million GO promissory notes series 2009 N1;

--$90.6 million GO promissory notes series 2010 N1;

--$71.1 million GO promissory notes series 2011 N3;

--$8.3 million GO refunding bonds series 2001-A;

--$54.1 million GO refunding bonds series 2002A;

--$39.4 million GO refunding bonds series 2005 A5;

--$17.5 million GO refunding bonds series 2009 B2;

--$9.4 million GO short-term promissory notes series 2004 N2;

--$6.7 million GO short-term promissory notes series 2005 N1.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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, and National Association of Realtors.

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

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Fitch Ratings
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Source: Fitch Ratings