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Fitch Ratings: Milwaukee, WI GOs 'AA'; outlook stable
1/17/2018

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

Fitch Ratings has assigned an 'AA' rating to the following Milwaukee, Wisconsin bonds:

--$70 million general obligation promissory notes, series 2018 N1.

Fitch has also affirmed Milwaukee's 'AA' Issuer Default Rating (IDR) as well as the ratings on various Milwaukee unlimited tax general obligation (ULTGO) bonds at 'AA'. A full list of the affirmed bonds follows at the end of this release.

The Rating Outlook is Stable.

Proceeds will be used to finance fiscal requirements of the city. While legally available for a variety of purposes, Fitch expects the city to use the proceeds to prepay the city's pension contributions for the years 2018-2022, in order to recognize prepayment savings. The notes will be sold via competitive sale on Jan. 24.

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.

ANALYTICAL CONCLUSION

The 'AA' IDR and GO ratings reflect the city's stable financial performance over time, exceptionally strong gap-closing capacity, and moderate long-term liabilities. A demonstrated capacity to cut spending, low expected revenue volatility 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.

KEY RATING DRIVERS

Revenue Framework: 'a'

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 constrained by state law but provides substantial flexibility given the city revenue system's limited vulnerability to economic downturns.

Expenditure Framework: 'aa'

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 that of revenue growth over time.

Long-Term Liability Burden: 'aa'

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'

The stability of the city's revenue streams makes the city's finances less vulnerable to decline in economic downturns. Reserves represent a sufficient safety margin given the limited vulnerability to economic cycles and high level of budgetary flexibility and control.

RATING SENSITIVITIES

Revenue Volatility: The 'AA' IDR and GO rating assume a continued low level of revenue volatility. Increased volatility could change Fitch's assessments of the adequacy of revenue control and 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 IDR and GO ratings.

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 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 city's second largest source of revenue (about 30%) is its property tax.

The historical revenue growth trend has been 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 generally 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 (46% of total spending), followed by general government at 35% and public works at 15% of fiscal 2016 general fund spending.

The pace of spending growth absent policy actions is likely to be moderately above growth in revenues, given the expected slow-growth environment.

Milwaukee's fixed cost burden is moderate, with carrying costs for debt, pensions and OPEB equaling about 18% 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

The combined debt and pension burden is moderate at 17% of personal income. A modest 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. The city maintains a public debt amortization fund ($58 million in 2016) which is governed by state statute and the city commission; it is funded from a portion of the city's interest earnings. The city may use up to 40% of the balance to retire debt each year but typically appropriates an amount approximating investment earnings for this purpose.

The pension plan in which the city participates reports a 92% asset-to-liability ratio, or 72% when adjusted by Fitch to reflect a 6% investment rate of return. The city used a five year note to prepay a significant portion of its annual pension payment, which generates annual savings. The contribution consistently meets actuarially-determined requirements. The city also records a fairly large other post-employment benefit (OPEB) liability equal to almost 5% of personal income.

Operating Performance

Milwaukee's revenue history exhibits stability contributing 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. The city typically appropriates a portion of its tax stabilization fund (TSF) to the operating budget, and generally returns a similar amount to the fund at year end. In fiscal 2017, the city appropriated $27.5 million from the TSF and returned only $10.5 million of that, contributing to a projected $19 million net general fund operating deficit (about 3% of spending). Management believes that $4-5 million of this deficit is due to timing issues and expects to realize that amount in fiscal 2018. The fiscal 2018 budget reduced the amount of TSF appropriation to $19 million and management expects to realize even or positive results from operations, which Fitch believes is reasonable given the lower appropriation.

Fitch affirms the following city of Milwaukee, WI ratings at 'AA':

--$104.2 million general obligation (GO) promissory notes, series 2017 N4;

--$14.5 million GO corporate purpose bonds, series 2017 B5;

--$13.6 taxable GO promissory notes, series 2017 T6;

--$4.6 million taxable GO corporate purpose bonds, series 2017 T7;

--$26 million GO corporate purpose bonds (taxable), series 2016 T4;

--$40.7 million GO corporate purpose bonds series 2016 B3;

--$11.6 million GO corporate purpose bonds series 2016 B6;

--$99.7 million GO promissory notes series 2016 N2;

--$9.1 million GO promissory notes series 2016 N5;

--$74.5 million GO promissory notes, series 2015 N2;

--$27.6 million GO corporate purpose bonds, series 2015 B3;

--$18.9 million taxable GO corporate purpose bonds, series 2015 T4;

--$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;

--$27.4 million GO corporate purpose bonds (taxable) series 2011 T5;

--$6.9 million GO corporate purpose bonds series 2008 B7;

--$38.4 million GO corporate purpose bonds series 2010 B5;

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

--$3.4 million GO promissory (taxable) notes series 2010 T2;

--$1.6 million GO promissory notes series 2008 N6;

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

--$11.7 million GO promissory notes series 2009 N1;

--$33.1 million GO promissory notes series 2010 N1;

--$26.5 million GO promissory notes series 2011 N3;

--$0.4 million GO refunding bonds series 2001A;

--$9.3 million GO promissory notes (taxable) series 2003 M10;

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

Contact:

Primary Analyst

Arlene Bohner

Senior Director

+1-212-908-0554

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

Secondary Analyst

Matthew Wong

Director

+1-212-908-0548

Committee Chairperson

Michael Rinaldi

Senior Director

+1-212-908-0833

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.
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