Fitch Affirms Milwaukee, WI's ULTGOs at 'AA'; Outlook Stable

Fitch Ratings has affirmed various unlimited tax general obligation (ULTGO) bonds for Milwaukee, Wisconsin (the city) at 'AA'. A full list of series rated by Fitch follows at the end of this release.

The Rating Outlook is Stable.

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

REGIONAL ECONOMIC CENTER: Milwaukee serves as the economic engine and employment center for the surrounding region. The city's economy continues to suffer the effects of the recession but has begun to show signs of recovery.

RESTRICTIVE REVENUE ENVIRONMENT: Milwaukee'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 state law.

STRONG BUDGETARY CONTROL: The city consistently outperforms its budget, which typically includes appropriation of reserves. Reserve levels tend to fluctuate, but minimal core levels are maintained according to policy.

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

RATING SENSITIVITIES

ECONOMIC TRENDS: The city's tax base and employment trends will be key to future credit evaluations.

RESERVE MAINTENANCE: The rating is sensitive to the city's ability to maintain tight budgetary control and maintain reserves at or above core policy levels.

CREDIT PROFILE

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's population of nearly 600,000 has shown stability or marginal growth since the 2000 census, reversing a multi-decade trend of decline.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER

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 a reduced but still above average reliance upon manufacturing.

The city's unemployment rate remained elevated at 9.3% in June 2014, well in excess of the state and national rates of 6.0% and 6.3%, respectively. The city's rate represents an improvement from the 10.8% recorded in June 2013, as employment growth exceeded labor force gains.

The city recorded several years of recessionary tax base declines and market value now stands 19% below the 2009 peak. The most recent year shows a very modest gain of 0.2%. This new data along with the several, large, new construction projects underway signal that tax base stabilization is likely.

Resident socioeconomic indicators are well below average with per capita income levels at 70% of the state-wide average and individual poverty rates more than double the state's. Education levels are also below average, with 22% of the adult population achieving a bachelor's degree versus 26% nationally.

RESTRICTED REVENUE ENVIRONMENT

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' with a Stable Outlook by Fitch). 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.

The city's second largest source of revenue (26%) is its property tax. Wisconsin municipalities are subject to statutory property tax revenue raising limitations which allow for growth in the operating levy only to the extent there is new construction added to the tax base. The levy for debt service is not subject to the limit. Net new construction generated only minimal levy capacity of $1.2 million in FY14. While revenue flexibility is constrained, the city could, if necessary and with state approval, increase its levy to allow for payment of GO debt that is currently paid from non-property tax sources. This would free up an estimated $60 million (roughly 7-8% of general fund operating spending).

STRONG BUDGETARY CONTROL

Budgetary oversight and control is strong. The city has demonstrated its willingness and ability to limit expenditures to maintain budget targets. Despite recently adding approximately 100 police personnel, current staffing remains more than 400 full time equivalents (6%) below the level of four years ago. 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.

CONSISTENT OPERATIONS; LIMITED RESERVES

The city operates under a framework which inhibits its ability to accumulate general fund reserves in amounts consistent with those of similarly rated large cities. Unrestricted general fund reserves have ranged from 7% to 12% of general fund spending in recent years. State law requires any operating surplus be applied to the next year's budget, or restricted for future years' budgets. This is accounted for through the tax stabilization fund (TSF), which is within the general fund.

Concerns over limited reserves are mitigated by the city's consistent outperformance of budgetary targets. The required appropriation of fund balance results in variable operating results on a GAAP basis; however, the city has demonstrated its ability to adhere to budgets which maintain core policy levels of reserves, even under severe recessionary pressure.

Positive budgetary variances generated general fund net operating surpluses (after transfers) in FYs 2011 and 2012 and a modest deficit representing essentially even operations in FY 2013. The FY 2013 unrestricted general fund balance was approximately 12% of general fund operating spending. The $62.9 million reserve in the public debt amortization fund (PDAF), equivalent to another 9% of general fund operating spending, augments financial flexibility. The permitted use of the PDAF is strictly defined and 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 FY 2014 budget appropriates $20 million from the TSF and includes a $5 million contingency line item, putting the gap of $15 million well within the range of previous years' outperformance of budget. The biggest vulnerability to achieving budgetary goals is severe weather, the costs for which could erode budgetary savings.

MANAGEABLE LONG TERM OBLIGATIONS

Overall debt ratios are moderate at $2,637 per capita and above average at 6.1% of market value. The very rapid amortization of 82% of both city and school principal in 10 years generates significant capacity for future capital needs. Future capital needs are manageable. Near-term borrowing plans include $38 million for schools and approximately $30 million for sewer to take out short-term financing.

The city's long-term liabilities related to employment benefits are generally positive. The city's pension plan is 91% funded on an actuarial basis, assuming an above-average 8.25% rate of return, or an estimated 80% 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. Facing projections of future declining funded status, the city prudently deposited $44 million into a pension reserve in both of those years, to be drawn down in years when the payment requirement resumes, until the actuarially derived smoothed payment level is achieved. The city drew $18.5 million from the pension reserve in 2013 to smooth the $46 million payment requirement and plans on drawing another $15.5 million in FY14 and smaller amounts in future years until the fund is entirely depleted in FY16 or FY17.

The city funds other post-employment benefits (OPEB) on a pay-as-you-go basis. The city has no plans to pre-fund the unfunded OPEB liability, which is significant at $889 million or 3.4% of taxable value as of Jan. 1, 2013. Carrying costs for debt service, pension and OPEB are moderate, amounting to 16% of governmental fund spending in FY 2013.

Fitch has affirmed the following Milwaukee ULTGO bonds at 'AA':

--$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;

--$32.6 million GO corporate purpose bonds (taxable) series 2011 T5;

--$13.7 million GO promissory (taxable) notes series 2003-M10;

--$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;

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

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

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

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

--$6.8 million GO promissory (taxable) notes series 2010 T2;

--$2.7 million GO promissory notes series 2005 N9;

--$14.0 million GO promissory notes series 2006 N1;

--$6.2 million GO promissory notes series 2006 N9;

--$5.6 million GO promissory notes series 2007 N4;

--$6.3 million GO promissory notes series 2008 N6;

--$30.1 million GO promissory notes series 2009 N1;

--$67.4 million GO promissory notes series 2010 N1;

--$50.2 million GO promissory notes series 2011 N3;

--$1.5 million GO refunding bonds series 2001-A;

--$22.7 million GO refunding bonds series 2002A;

--$29.3 million GO refunding bonds series 2005 A5;

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

--$2.3 million GO short-term promissory notes series 2005 N1.

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, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=873594

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.