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

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

--$27.8 million 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 Redevelopment Authority of the City of Milwaukee. The city of Milwaukee (the city) is directed to use any money in the School Operating Fund if the payment is not made. If payments are not made to the trustee, the trustee is directed to intercept state aid payments.

KEY RATING DRIVERS

RATING APPROACH: The 'AA-' rating now reflects the creditworthiness of the state intercept created specifically in support of the series C and D bonds. The intercept rating (one-notch below the state's GO rating) is higher than Fitch's assessment of the underlying credit quality of MPS which is closely tied to the city's ULTGO rating, downgraded to 'AA' on Oct. 2, 2012.

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

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. State equalization aid received in fiscal 2011 provided strong coverage of projected maximum annual debt service (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's funds.

WHAT COULD TRIGGER A RATING ACTION

CHANGE IN STATE CREDIT QUALITY: An increase in the state's rating could result in an upgrade to these bonds, which carry a rating commensurate with the state's appropriation obligations. Conversely, a decrease in the state's rating could result in a downgrade.

IMPROVEMENT IN CITY'S AND/OR MPS CREDIT QUALITY: Significant improvement of the city's rating and/or Fitch's opinion on MPS's underlying credit fundamentals could cause an upgrade to these bonds.

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 which precedes the debt service payment date by at least a few days (depending on the year), 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 from remaining amounts of appropriate state aid to the trustee, on the 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), an improvement in the state's credit quality could change the credit profile for the bonds.

STATE AID PROVIDES STRONG COVERAGE

MPS receives state equalization aid in July, September, December, March and June. The principal payment date for the bonds is April 1, making the March payment the most likely to be intercepted. The April 2011 state equalization aid payment provided a strong 5.5 times (x) coverage of MADS. Adding the June 2011 payment improves coverage to 13.5x.

While 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. Series C bonds are capital appreciate bonds maturing between 2026 and 2041.

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's funds. This interconnectedness enhances the underlying credit quality of MPS which has a complex back-loaded debt profile and weak but improving finances.

MPS is governed by the Milwaukee Board of School Directors (MBSD), but the city levies and collects the taxes necessary to support the 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. MPS lacks authority to issue debt directly, so the city (either directly or through the RDA) issues on MPS's behalf, including cash flow notes to help smooth MPS's cash flow throughout the year.

MPS FINANCES SHOW SIGNS OF STABILIZATION

MPS has made progress in containing expenditures, although it remains challenged to meet its rapidly growing special education needs in an environment of declining state aid, waning enrollment, and a contracting tax base. State equalization aid accounts for a high proportion of MPS revenues. In fiscal year (FY) 2011, state aid amounted to 59.4% of general fund expenditures, down from 64% in FY2008. Fitch notes that MPS did not appropriate reserves in its fiscal 2011 and 2012 budgets, improving prospects for long-term structural balance.

Operating deficits in the past four years reduced general fund balance to 7.7% of general fund expenditures at the end of fiscal 2011 from 10.5% at the end of fiscal 2007. Fiscal 2011 ended with essentially balanced operations, with a very modest general fund net operating deficit equivalent to 0.03% of spending. Unrestricted General Fund balance (the sum of committed, assigned and unassigned under GASB 54) amounted to 5.6% of expenditures in FY2011.

Preliminary FY2012 results point to balanced operations, consistent with the budget. MPS began to realize benefits in fiscal 2012 from recently negotiated provisions for health care premium sharing, which were expected to generate $30 million annualized savings. The fiscal 2013 budget is balanced with no use of reserves.

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, 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' (June 19, 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

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=681239

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Source: Fitch Ratings