Fitch Rates Milwaukee, WI's $180MM School RANs 'F1+'
Fitch also affirms the 'F1+' rating on the city's $90 million RANs series 2016 R1.
The RANs are expected to sell via competitive sale on October 6. Proceeds will be used for school cash flow purposes.
Note principal and interest repayment is secured by an irrevocable pledge of school state aid payments and all school operations fund revenues for the 2016-17 fiscal year that are due and not yet paid to the city or otherwise pledged or applied. Note interest repayment is also secured by a pledge of surplus revenues of the debt service fund of the city.
KEY RATING DRIVERS
RELATIONSHIP TO CITY RATING: While the notes are not general obligations of the city, Fitch believes the city's management of the Milwaukee Public Schools' (MPS) funds and provision of liquidity for MPS create a relationship that supports the highest long-term rating on the notes. MPS effectively functions as a department of the city (GOs rated 'AA') according to state statute.
SUFFICIENT, TIMELY STATE AID: Although all available school operating revenue for fiscal 2017 is pledged to note repayment, the authorizing resolution directs city officials to segregate the June and July 2017 state aid payments for payment of the full amount of the notes. Fitch expects a satisfactory level of additional resources would be available to make the repayment in the event of reduced or delayed state aid. Interest on the RANs is additionally secured by surplus revenues of the city's debt service fund. The city historically has had adequate financial resources to cover note interest.
REGIONAL ECONOMIC CENTER: 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.
CITY LONG-TERM RATING: The 'AA' rating reflects the city's stable financial performance over time, strong gap-closing capacity, and moderate long-term liabilities level. A demonstrated capacity to cut spending and sufficient financial cushion offset Fitch's expectation for limited revenue growth.
LONG-TERM RATING: The rating on the notes is sensitive to changes in the city's long-term credit fundamentals. A change in the city's GO rating could result in a downgrade of the note rating. The Stable Outlook on the city's GO rating reflects Fitch's expectation that such a change is unlikely.
CHANGE IN SCHOOL FUNDING LANDSCAPE: Although not anticipated, a notable shift in the level or timing of state funding for school districts could affect the short-term rating.
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. The school system's service area is coterminous with 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. It is governed by the Milwaukee Board of School Directors (MBSD), and the city levies and collects the taxes necessary to support the separately adopted MBSD budget. MPS independently provides elementary and secondary education and independently controls the budget but lacks authority to issue debt directly. The city issues on MPS's behalf, including short-term notes to help smooth MPS's cash flow throughout the year. The city also provides liquidity directly, when needed, for school operations.
SUFFICIENT, TIMELY STATE AID FOR RAN REPAYMENT
State equalization aid, which is primarily derived from state income taxes, is generally unrestricted financial assistance to school districts to fund a broad range of expenditures. The aid in any fiscal year is computed using the prior fiscal year's enrollment and equalized property valuations. The state distributes school aid five times a year based on an allocation formula and last year MPS received 15% of total state aid in September, 25% in December, 25% in March, 34% in June and 2% in July. Pursuant to a city resolution, the city treasurer will segregate the June state aid payment to pay principal of the RANs.
Note repayment is due on Oct. 1, 2017. Projections show adequate coverage in the June segregation month with available cash balances covering note principal by 1.26x.
The city has demonstrated willingness and ability to provide operating cash flow support to MPS at multiple points throughout the fiscal year. Fitch expects the city to continue to provide strong liquidity support to MPS in fiscal 2017 and beyond.
NARROWLY BALANCED MPS FINANCES
Similar to many urban school districts in the U. S., MPS is challenged in recent years to provide educational services to a largely disadvantaged student population in an environment of declining-to-stagnant state aid, waning enrollment, and a contracting tax base. Long-term conditions have improved somewhat in recent years, with relative stabilization evident in enrollment, state aid and the tax base. State equalization aid accounts for a high but declining proportion of MPS revenues. In fiscal year (FY) 2015, state aid amounted to 60% of general fund expenditures, down from 64% in FY2008.
MPS operates in a tight financial environment, managing to a fairly narrow unreserved general fund balance reserve, equivalent to 4.1% of spending in fiscal 2015. Operations are generally structurally balanced each fiscal year with mild general fund net operating deficits after transfers attributable to deposits to the other post-employment benefits (OPEB) trust at the end of each fiscal year, for which the district receives favorable reimbursement from the state.