CHICAGO — Fitch Ratings hit Milwaukee with a one notch downgrade to AA as the city faces lingering economic stress with limited reserves and recently restricted powers to raise revenues.
The downgrade comes as city Comptroller Martin Matson’s office is preparing to competitively sell $120 million of school cash-flow notes on Tuesday. Fitch was not asked to rate the notes.
Moody’s Investors Service and Standard & Poor’s assign the revenue anticipation notes their top short-term ratings. Over the summer, both affirmed the city’s general obligation ratings of Aa2 and AA on $960 million of debt.
Robert W. Baird & Co. is advisor on the note sale and Katten Muchin Rosenman LLP is bond counsel.
Fitch assigned a stable outlook to Milwaukee’s rating after downgrading it from AA-plus. It previously had assigned a negative outlook.
“The city’s financial challenges are underscored by the extremely limited revenue environment for Wisconsin municipalities,” analysts wrote.
The city’s largest source of operating revenues, state revenue sharing aid, “has been stagnant and only very limited increases in the property tax levy are allowable under new state law,” Fitch added.
Local governments also face strict property tax caps to offset state aid cuts.
Milwaukee relies on state revenue for 40% of its general fund revenues but Gov. Scott Walker’s biennial budget approved last year relied on sharp cuts in local aid, with the city taking a $10 million hit in fiscal 2012.
The city will see a slight increase in fiscal 2013 and the state’s advances in balancing its budget ease concerns of another big hit in the next two-year spending plan.
Milwaukee is expected to benefit fiscally from the controversial state law curtailing collective bargaining rights of public employees. Opponents have won victories challenging the law at the state and federal court level but Wisconsin has appealed.
“Fitch believes the city will continue to benefit from a key Act 10 provision which was not affected by either ruling — the elimination of binding arbitration in favor of a mediation procedure that imposes the employer’s final and best offer. This should help the city control labor costs in the near term, as several labor agreements are currently open,” analysts wrote.
The credit benefits from the city’s role as the economic engine for southeastern Wisconsin, but while the region’s economy is on the mend, Milwaukee’s recovery has been slower. The city’s unemployment rate was 11.4% in July, higher than the state average of 7.4% and national average of 8.6%.
Milwaukee’s 2012 budget was balanced with the use of $13.7 million in general fund tax-stabilization fund reserves. The city’s proposed 2013 budget cuts jobs, limits a property tax levy increase to less than 1%, and relies on $13.9 million from the tax-stabilization reserve and $18.5 million from a flush pension reserve as the fully funded pension system did not require actuarially required contributions in 2010 and 2011.
The city closed out 2011 with a general fund balance that equaled 11.3% of spending and it also benefits from a $67.3 million reserve in its public debt amortization fund.
The notes are secured by school operating revenues including state aid through June 30, 2013. The city pledges to cover interest on the notes from surplus revenues in its special debt service fund.
“In our view, there is adequate debt service coverage upon note maturity from projected amounts on deposit in the school operations fund,” Standard & Poor’s analyst John Kenward said.
Milwaukee officials estimate a cash balance in the school operations fund of $33.1 million at the end of June 2013 after note principal is paid.
