Fitch Affirms Milwaukee County, WI GOs and Pension NANs; Outlook Revised to Stable
Fitch Ratings has affirmed the following Milwaukee County ratings:
--approximately $627.1 million unlimited tax general obligation (ULTGO) bonds at 'AA+';
--$135.0 million taxable pension note anticipation notes, series 2009B at 'AA'.
Fitch Ratings has withdrawn the 'AA+' rating on the Milwaukee County (WI) GO refunding bonds series 2004A as the bonds were not sold.
The Rating Outlook is revised to Stable.
The GO bonds are secured by the county's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The pension notes series 2009B are special obligations of the county, for which the county has authorized and covenanted to issue securities to repay the series 2009B notes prior to maturity. Interest on the notes is payable from any legally available funds of the county, subject to annual appropriation. Principal is payable solely from the issuance of refunding bonds.
KEY RATING DRIVERS
OUTLOOK REVISION: The Outlook revision to 'Stable' from 'Negative' stems from the county's demonstrated ability to generate consistent balanced financial operations, despite adverse economic conditions and state-imposed revenue restrictions.
REGIONAL ECONOMIC ENGINE: Milwaukee County serves as the economic engine for the surrounding region although post-recession recovery has been slow.
BELOW AVERAGE SOCIOECONOMIC INDICATORS: Per capita income levels are below average, as is market value per capita. The unemployment rate remains elevated, typical of areas historically dependent upon manufacturing.
FLEXIBILITY DESPITE NARROW MARGINS: Conservative budgeting and careful expenditure control have allowed for consistently balanced operations most years, despite statutory requirements to appropriate surplus. The county retains considerable margins of flexibility despite stricter revenue raising constraints imposed by the state.
MANAGEABLE LONG-TERM LIABILITIES: The overall debt burden is above average but manageable, future capital needs are limited, and principal amortization is rapid. Pensions are adequately funded, in large part through the issuance of pension obligation bonds in 2009.
RATING DIFFERENTIATION: The one-notch rating distinction between the general obligation (GO) and the Pension Notes reflects the annual appropriation risk.
The Outlook revision, to Stable from Negative, reflects Milwaukee County's balanced financial performance in fiscal 2010 and 2011 which followed an unforeseen operating deficit in fiscal 2009. Recent fiscal gains occurred in the context of adverse economic conditions and the revenue-raising constraints under which the county operates, and are thus indicative of the county's solid management profile, in Fitch's view.
Although the county operates under limitations to revenue raising and to maintenance of fund balances, considerable fiscal flexibility is provided by the county's ability to reduce spending or redirect expiring levies for maturing debt, among other sources. The Stable Outlook assumes management continues to achieve consistently balanced results within existing constraints. However, future economic or revenue underperformance or a narrowing of operating flexibility could negatively affect the credit.
REGIONAL ECONOMIC ENGINE
Milwaukee County serves as the regional economic and cultural center for south eastern Wisconsin. The city of Milwaukee ('AA' with a Stable Outlook, by Fitch), which is the county seat of Milwaukee County, accounts for roughly 48% of the county's total assessed valuation and 63% of its population.
BELOW AVERAGE SOCIO-ECONOMIC INDICATORS
Wealth levels are below average, largely reflective of the county's urban core. Per capita income is 89% of the state, and 86.7% of the national levels. Housing values remain under pressure, contributing to the decline in assessed value; 2012 assessed value represented a 10.7% drop since the peak in 2009. The August 2012 unemployment rate of 9.2% was largely unchanged from the year prior, and remained above both the state (7.1%) and national (8.2%) averages.
FLEXIBILITY DESPITE NARROW MARGINS
The county's financial operations are characterized by stable operating results and modest general fund balances, in the range of 4 - 5% of spending. Tax rate limits have been in effect since 1993. Additional state legislation 2011 strengthened the revenue restrictions, but revenue-raising flexibility remains.
Under current restrictions, the county could raise the property tax by $9.3 million for fiscal 2013 and another projected $8 million in fiscal 2014. Additionally, if the county chose to levy for unlimited tax bond debt service currently supported by sales tax revenues, it could free up more than $60 million of sales tax revenues for operations. Liquidity is adequate across funds and no cash flow borrowing is required.
The county has recorded nominal general fund operating surpluses after transfers in four of the past five years despite state-imposed revenue restrictions. Fiscal 2011 general fund results generated a higher than usual net surplus of $14.8 million, or 1.4% of spending, despite the budgeted appropriation of $4.1 million of general fund balance.
The positive variance was largely the result of cost containment measures, as revenues underperformed budget for the year. Expenditure side savings included the introduction of employee contributions for pension and health care, slow filling of vacant positions, limitation of overtime and lower road maintenance costs due to a mild winter.
The county's revenue streams are diverse with charges for service accounting for 37% of total general fund revenues, followed by intergovernmental revenue at 26%, property tax at 26%, and sales tax revenue at 6%. The county ended 2011 with an improved but still slim 5.7% total general fund balance, somewhat higher than the 4.0 to 4.5% range recorded in recent years. Given the small financial cushion, the county's ability to successfully achieve balanced operations will continue to be crucial to ratings stability.
The adopted 2012 budget included a $5.8 million (2.2%) property tax increase, a $1.55 million budgeted contingency reserve, and a de minimus amount of appropriated general fund balance. Officials are projecting a $5.9 million general fund net operating surplus, mainly based upon $4.1 million of transit-related savings and sales tax receipts running $1.5 million over budget through June; however, over-budget spending in the sheriff's department may present a challenge to full realization of the projected surplus.
The recommended fiscal 2013 budget calls for no increase in the property tax levy, appropriates $5.5 million of general fund balance, and includes a $3 million budgeted contingency reserve.
MANAGEABLE LONG-TERM OBLIGATIONS
The aggregate debt burden is elevated at 5.7% of full market value but more moderate at $3,669 per capita. Approximately 0.7% of the debt burden is attributable to the pension obligation debt, and represents the exchange of one type of long-term obligation (unfunded pension liability) for another (bonded debt). Principal amortization is rapid with 74.6% repaid in 10 years, however, this is expected to slow somewhat when the note anticipation note portion of the pension obligation borrowing is fixed later this year.
Debt service accounted for a manageable 9.5% of fiscal 2011 general fund expenditures, and should remain affordable as the county retires principal in greater amounts than it issues. The county's five-year capital improvement plan to be debt financed totals roughly $108 million, which is less than half the principal retired over same period.
Milwaukee County's long-term liabilities related to employment benefits are mixed. The county provides pension benefits to its employees through single employer defined benefit plans. As of January 2012, the unfunded actuarial accrued liability (UAAL) totaled $314 million or a modest 0.5% of full market value.
Based on Fitch's more conservative 7% investment return assumption, the pension plans were 79% funded. The 79% funded ratio is considered adequately capitalized; however the ratio was bolstered by $400 million in pension bonds in 2009 to augment pension assets.
Other post-employment benefits (OPEB) are also offered to retirees and their dependents. The county contributed $58.2 million, which equaled the pay-as-you-go amount, in 2011. As of January 2011, the UAAL totaled $1.5 billion or a meaningful 2.4% of full market value. Recently implemented healthcare plan design changes for non-represented employees and retirees are expected to reduce the OPEB liability by $230 million or approximately 15%.
The combined pension and OPEB payments equaled a reasonable 11.7% of general fund expenditures and transfers out, including amounts contributed in excess of the ARC.
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 (Public Financial Management).
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
U.S. Local Government Tax-Supported Rating Criteria
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