Fitch Ratings – New York – 14 Oct 2021: Fitch Ratings has assigned ‘AA’ ratings to the following Milwaukee County, WI unlimited tax general obligation (ULTGO) notes:
–$95,780,000 taxable GO pension promissory notes, series 2021A;
–$4,180,000 GO promissory notes, series 2021B;
–$10,530,000 GO transit promissory notes, series 2021C.
Fitch has affirmed the county’s Issuer Default Rating (IDR) and outstanding GO bond ratings at ‘AA’.
The Rating Outlook is Stable.
The notes are expected to sell competitively on Oct. 26, 2021. Proceeds of the 2021A notes will advance refund the 2023 through 2030 maturities of the county’s taxable general obligation pension promissory notes, series 2013. The 2021B notes will be used to acquire fleet equipment and the 2021C notes will pay the costs of acquiring new buses and improvements for the county’s bus rapid transit program and other transit related improvements.
SECURITY
The GO notes are backed by the county’s full faith and credit and its ad valorem tax, without limitation as to rate or amount.
ANALYTICAL CONCLUSION
The ‘AA’ rating reflects the county’s moderate long-term liability burden and superior gap-closing ability, considering the county’s inherent budget flexibility and assuming minimal expected revenue volatility during a typical economic cycle. The rating also reflects Fitch’s expectations for stagnant revenue growth, given the county’s inability to capture growth in the tax base outside of that related to net new construction and expectations for continued flat population growth.
Economic Resource Base
Milwaukee County and its county seat, the city of Milwaukee, serve as the economic engine for the surrounding region and have a fairly diverse economic and employment base. Population growth has been flat, and wealth levels are generally below average.
KEY RATING DRIVERS
Revenue Framework: ‘a’
Fitch expects revenue to continue to grow at a rate below inflation. The county retains a satisfactory level of overall revenue-raising flexibility with its fees and charges despite strict property tax levy limits.
Expenditure Framework: ‘aa’
Fitch expects the natural pace of spending growth to be above that of revenues, requiring ongoing budget management. The county has demonstrated the ability to control expenditures when necessary, aided by a flexible workforce environment. Carrying costs for long-term liabilities are somewhat elevated at 22% of spending, partially due to the rapid amortization of both direct debt and the net pension liability (NPL).
Long-Term Liability Burden: ‘aa’
The long-term liability burden is moderate, with overall debt and the adjusted NPL at about 10% of personal income.
Operating Performance: ‘aaa’
Superior financial resilience is a product of the maintenance of reserves both inside and outside the general fund, which should allow the county to maintain an adequate level of financial flexibility throughout an economic cycle given expected low levels of revenue volatility and high budgetary flexibility.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–A significant decline in the county’s long-term liability burden to a sustained level at less than 10% of personal income;
–Expectations for improved revenue growth in line with or above the rate of inflation.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–An increase in carrying costs to a level that impedes the county’s ability to manage expenditures;
–An inability to maintain reserve levels above a ‘aaa’ reserve safety margin.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
CURRENT DEVELOPMENTS
Milwaukee County Coronavirus Impact
The county finished 2020 with positive operating results, largely due to use of around $27 million in CARES Act funds for eligible purposes. The county also underspent its budget on medical costs due to medical claims lower than budget. The county did not spend its $5.5 million budgeted contingency amount and also had $4.6 million in revenue from a land sale. These items enabled the county to have a surplus of almost $34 million despite some negative variances in some departments, such as the zoo. Management utilized $5 million of the surplus to be budgeted for the 2022 adopted budget and transferred the remainder to the debt service fund, where it can be used to offset the county’s tax levy for debt service, giving the county additional flexibility.
In 2021, county management expects a surplus of over $11 million. This is largely due to sales tax tracking $7.3 million over budget and a $5 million budgeted contingency that the county does not expect to use. This is partially offset by a shortfall in budgeted investment earnings.
CREDIT PROFILE
Milwaukee County is the largest county in the state of Wisconsin, with a population estimated at around 940,000 in 2020. The county encompasses a 242-square-mile area adjacent to Lake Michigan, 90 miles north of Chicago. The city of Milwaukee, which is the seat of Milwaukee County, accounts for around 40% of the county’s equalized valuation and 60% of its population.
Revenue Framework
Property taxes are the largest source of revenue, providing 33% of fiscal 2020 general fund revenues, followed by intergovernmental revenue at 36%.
Fitch expects that revenue growth absent policy action will be below the rate of inflation, given economic fundamentals and trends. Assessed value (AV) has grown modestly over the past several years, as housing values have recovered from substantial declines during the Great Recession while new construction has picked up. The state’s property tax revenue framework can only capture AV growth from net new construction.
The county’s independent legal ability to raise revenues is satisfactory relative to expected revenue declines in a downturn, stemming from its ability to raise fees and charges as necessary.
Expenditure Framework
Human services accounted for about 50% of fiscal 2020 general fund spending plus transfers out, followed by public safety at 21%.
Fitch expects the natural pace of spending growth to be above that of revenue growth, requiring active management of expenses. Pension costs have increased in recent years, as the county lowered its discount rate assumption in 2018, with another decrease to 7.5% in 2020. The county has also shifted to a 20-year layered amortization (from 30 years), which has subsequently increased pension contribution levels but will make the pension obligation more sustainable going forward.
The county demonstrated an ability to implement cuts during recent downturn. Wisconsin’s Act 10 affords the county substantial flexibility to manage its labor costs. Fitch expects carrying costs for debt service, pensions and other post-employment benefits (OPEB) to remain manageable. Rapid repayment of direct debt provides further indication of expenditure flexibility.
Long-Term Liability Burden
The long-term liability burden is moderate at around 10% of personal income. Overlapping debt represents the majority (71%) of the long-term liability burden. The Fitch-adjusted NPL accounts for 20% and direct debt represents 9% of the long-term liability, respectively. A significant portion of the county’s direct debt relates to pension obligation notes issued in 2009 and 2013. The county plans to budget $40 million to $50 million annually in additional debt over the next five years. County bond issuances are based on a cashflow basis for the various capital projects; therefore, actual bond issuance could vary.
The county provides pension benefits to its employees through single-employer, defined-benefit plans. The fiscal 2020 combined ratio of assets to liabilities was a reported 75%. Based on its standard 6% investment return assumption, Fitch estimates the combined ratio at 65%. OPEBs are also offered to retirees hired before 1994 and their dependents.
Operating Performance
The county maintains a small amount of unrestricted general fund reserves supplemented by a variety of other available reserves outside of the general fund. These combined reserves provide very strong gap-closing capacity given the county’s high inherent budget flexibility through an economic cycle.
The county has maintained steady reserves during the prior recovery period with little use of nonrecurring support of operations. It generated a large surplus in fiscal 2020, largely due to CARES Act funds. The unrestricted portion of general fund balance combined with other available resources is equivalent to around 12% of fiscal 2020 general fund spending.
In addition to the sources of information identified in Fitch’s applicable criteria specified below, this action was informed by information from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
| ENTITY/DEBT | RATING | PRIOR | |||
|---|---|---|---|---|---|
| Milwaukee County (WI) [General Government] | LT IDR | AA | Affirmed | AA | |
| Milwaukee County (WI) /General Obligation – Unlimited Tax/1 LT | LT | AA | Affirmed | AA |
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- FAST Econometric API – Fitch Analytical Stress Test Model, v3.0.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Milwaukee County (WI) | EU Endorsed, UK Endorsed |
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