Fitch Rates Milwaukee County, WI GOs 'AA+'; Outlook Stable
--$31.7 million general obligation (GO) corporate purpose bonds, series 2015A;
--$15.4 million GO refunding bonds, series 2015B;
--$4 million GO corporate purpose bonds, series 2015C
--$4.9 million taxable GO mass transit bonds (QECBs-Direct Payment), series 2015D.
The series 2015A and 2015B bonds are expected to sell via competition on Oct. 14. Proceeds of series 2015A will fund various capital projects and series 2015B will refund the outstanding maturities of the general obligation corporate purpose bonds, series 2006A. The 2015C and 2015D bonds are expected to sell via competition on Oct. 29. Proceeds of series 2015C will fund various capital projects and series 2015D will provide financing for buses of the county's mass transit system.
In addition, Fitch affirms the following ratings:
--$637.6 million outstanding general obligation bonds at 'AA+'.
The Rating Outlook is 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.
KEY RATING DRIVERS
FLEXIBILITY DESPITE NARROW MARGINS: Conservative budgeting and careful expenditure control have allowed for consistently balanced operations most years, despite adverse economic conditions and statutory requirements to appropriate surplus. The county retains considerable margins of flexibility despite stricter revenue raising constraints imposed by the state.
REGIONAL ECONOMIC ENGINE: Milwaukee County serves as the economic engine for the surrounding region although post-recession recovery has been slow. Tax base growth has turned modestly positive following several years of declines.
BELOW AVERAGE SOCIOECONOMIC INDICATORS: Per capita income and market value levels are below average. The unemployment rate remains somewhat elevated, typical of areas historically dependent upon manufacturing.
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.
DIMINISHED FINANCIAL FLEXIBILITY: 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.
Milwaukee County serves as the regional economic and cultural center for south eastern Wisconsin. The city of Milwaukee (rated 'AA' with a Stable Outlook by Fitch), which is the seat of Milwaukee County, accounts for roughly 48% of the county's total assessed valuation and 63% of its population. Annual population growth since 2010 has averaged a low 0.1% to 956,406 in 2014, consistent with the prior decade.
FLEXIBILITY DESPITE NARROW MARGINS
The county's financial operations are characterized by stable results and modest general fund balances, in the range of 4%-7% of spending. The county operates under limitations to revenue raising and maintenance of fund balances; however, considerable fiscal flexibility is provided by the county's ability to reduce spending or redirect levies for maturing debt, among other sources.
The fiscal 2015 raised the property tax levy by $3.7 million, retaining approximately $8.5 million (3%) in available levy margin going into fiscal 2016. The county had $40 million at the end of 2014 and projects to end 2015 with $37.5 million of reserves in the debt service fund (equivalent to 4% of general fund spending) which could provide additional operational support. Liquidity is adequate across funds and no cash flow borrowing is required.
Year to date projections anticipate an $18.5 million budget surplus for the year, largely due to health care savings, but unbudgeted pension costs will likely result in even operations or a slight net operating deficit for the year.
UNEXPECTED PENSION EXPENSES
Midyear during 2015, the county learned of an error in its main pension plan's actuarial reports for the past two years. The net effect of the error was that the calculated annual required contribution (ARC) was $16 million (30%) lower than it should have been for each of 2014 and 2015. In addition, the county made some actuarial assumption changes, including shortening the amortization period from 30 to 20 years, which caused the 2016 ARC to increase by another roughly $4 million. The county is planning on using $8-10 million of its 2015 operating surplus to pay down some of the accumulated shortfall and expects to amortize the remaining $22-24 million shortfall over the next three to five years. The county also plans to use a portion of the debt service fund to offset the roughly $20 million total increase in the pension ARC for 2016 (2% of 2014 general fund spending).
POSITIVE FISCAL TREND DESPITE RESTRICTIONS
The county has recorded nominal general fund operating surpluses after transfers in each of the past five years despite adverse economic conditions and revenue-raising constraints, underscoring the county's solid management profile.
Fiscal 2014 general fund results generated a small net surplus of $6.2 million, or 0.6% of spending, despite the budgeted appropriation of $8 million of general fund balance, as is typical for the county. The county's revenue base is heavily dependent on state funding with charges for service (primarily family care costs reimbursed by the state) accounting for 40% of total general fund revenues, followed by property tax at 27%, intergovernmental revenue at 22%, and sales tax revenue at 6%. The county ended 2014 with an improved 7.9% total general fund balance, continuing a trend of very slight increases in reserves. Given the small financial cushion, the county's ability to achieve balanced operations will continue to be crucial to rating stability.
The proposed fiscal 2016 budget holds the property tax levy flat, offsetting the $20 million increase in pension costs with transfers from the debt service fund reserves. Fitch expects the county to phase out reliance on non-recurring measures to help ease the transition to higher ARC levels by the 2018 budget year.
BELOW-AVERAGE SOCIO-ECONOMIC INDICATORS
Wealth levels are below average, largely reflective of the county's urban core. Per capita income is 88% of the state and 86% of the national levels. Housing values have continued to be under pressure, contributing to the decline in assessed value, as recovery has lagged the nation. Fiscal 2015 assessed value remains 7.7% below the 2010 peak. Values have shown 1-2% growth for the past two years. Fitch expects overall tax base growth to be modest with slow improvement in housing values and minimal new development activity.
The county's June 2015 unemployment rate of 6.4% represented an improvement over the 7.4% recorded one year prior, although this is largely attributable to contraction in the labor force outpacing modest declines in employment. The June 2015 rate remains above both the national rate of 5.5%, and the state rate of 4.9%.
MANAGEABLE LONG-TERM OBLIGATIONS
The aggregate debt burden is elevated at 6.1% of full market value but more moderate at $3,616 per capita. A significant portion of the county's direct debt 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). Most of the debt burden is related to city borrowing. Principal amortization is rapid with 75.4% repaid in 10 years.
The county expects to issue $40-50 million to finance its five-year capital improvement plan, which is slightly less than the amount of principal scheduled to be 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. The combined funded ratio was a reported 80.8%. Based on Fitch's 7% investment return assumption, which is more conservative than the plans' assumptions, Fitch estimates the pension plans to be a combined 73.4% funded using the actuarial value of pension assets.
Other post-employment benefits (OPEB) are also offered to retirees and their dependents. The county contributed the pay-as-you-go amount of $55.5 million in 2014. As of January 2014, the UAAL totaled $973 million or a meaningful 1.7% of market value.
Carrying costs in fiscal 2014 (the combined pension, OPEB, and debt service payments) equaled 18.8% of governmental fund expenditures. Carrying costs would have been slightly higher, but still affordable, if calculated using the corrected ARC figure.