CHICAGO — Milwaukee will competitively sell up to $50 million of general obligation corporate-purpose qualified school construction bonds on behalf of the Milwaukee Public Schools today in a deal that will help the struggling district pay for capital projects and maintenance.
The issue marks one of a handful and one of the largest to be sold competitively under the tax-credit program established in the federal stimulus law. Though the number of investors for QSCBs is limited and some small, unrated deals have had trouble in competitive sales finding buyers, Milwaukee Comptroller W. Martin Morics’ office, which sells bonds on the district’s behalf, expects the issue will do well given its size and the city’s strong ratings.
Buyers of QSCBs have demanded a supplemental coupon in addition to the tax credit and the city expects to pay a coupon in the range of 0.5% to 1%.
“Obviously, the interest is still much less than a tax-exempt financing, so it’s still a great deal,” said deputy comptroller Michael Daun. The tax-credit qualifying interest rate is set daily by the Treasury Department based on a review of a pool of bonds. That rate was 5.99% on Monday.
The bonds mature in 16 years, the maximum under the program, and the structure calls for mandatory sinking fund payments beginning in 2013 and continuing through the life of the bonds. Milwaukee is required under Wisconsin state law to sell GOs competitively, although it has the ability to reject bids if officials deem them too high given the market’s prevailing rates.
If no bids are received, Milwaukee would then issue a request for proposals to select an underwriter to negotiate a sale, said city public debt specialist Richard Li.
Ahead of the sale, all three rating agencies affirmed the city’s ratings. Moody’s Investors Service rates the deal and the city’s $784 million of debt Aa2 with a negative outlook. Fitch Ratings rates Milwaukee AA-plus with a negative outlook. Standard & Poor’s rates it AA.
Moody’s said the rating reflects “the city’s favorable debt structure featuring rapid repayment … a manageable level of debt, the support provided by a sizeable public debt amortization fund, a significant economic base, and pressured financial position.”
Fitch said Milwaukee also benefits from conservative financial management and strong debt policies, but is assigned a negative outlook due to its weakened fiscal position and challenges going forward.
“Fiscal 2010 will likely be a challenging year for the city as it works to settle bargaining-unit contracts within the constraints of flat state aid and reduced tax base growth,” Fitch analysts wrote.
Milwaukee’s financial position peaked in 2006 with an undesignated general fund balance of $58.9 million, but since then the city has drawn on general fund balances as it has faced declining state aid and spending pressures.
The city anticipated a further drawdown this year, but preliminary figures now show it will close out the year in a stronger fiscal position due to $15 million in spending cuts and wage concessions. It is hampered by a limited ability to raise revenues and a drop in state revenue sharing, which accounts for nearly half of its general fund.
The tax-credit bond deal comes as the future control of the school system is being debated. The district’s fate is in state lawmakers’ hands. Gov. Jim Doyle recently unveiled a package of legislation that would hand the control of the troubled public school system over to the city’s mayor, Tom Barrett.
The package, which included control of the system and statewide reform proposals, has legislative sponsors and the support of the mayor, but not all are on board. Some city Common Council members have questioned whether the legislation gives the mayor too much control, and other lawmakers have countered with their own proposal that limits the mayor’s power or keeps intact the school board’s authority.