Milwaukee ready to test a still-fluctuating primary market

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The Milwaukee comptroller's office is highlighting what it describes as the city's tax revenue insulation from the economic turbulence caused by COVID-19 as the city prepares to wade into the market.

The city — hit with two new negative rating outlooks — plans Thursday to competitively sell five series of bonds and notes. City officials say they're watching the market closely and the sale timing could change given the hourly flutuations. Officials also have the right to reject bids if they come into high or the deal lacks sufficient interest.

A view of Milwaukee, which plans to sell $296 million of bonds and notes.

They are $120 million of revenue anticipation notes to smooth cash flow needs until it receives state revenue funds, $130 million of general obligation promissory notes, $31 million of corporate purpose GO bonds, $9.7 million of taxable GO notes and $5.2 million of taxable corporate purpose GO bonds.

The deal will free up space in a $50 million credit line by converting the new-money borrowing, as planned, to long-term debt.

Ahead of the sale Fitch Ratings and S&P Global Ratings affirmed the city’s AA-minus GO ratings but shifted their outlooks to negative from stable citing 2019 operating results. Both cut the rating by one notch last year.

While the plan has long been to sell Thursday, the city was watching the market closely after the liquidity-driven turbulence of the last two weeks. Comptroller Martin Matson and his finance team will move forward but if the market’s choppiness resumes could reject bids.

“We had been planning this date for months and it seems the market is starting to loosen up and rates are still attractive in the absolute sense,” public debt specialist Richard Li said early Tuesday, adding that his hope is also that the deal could help with pricing stability.

The city could wait on the long-term bond proceeds but the RANs that provide cash until the city receives state revenue-sharing funds late in the year are more urgent.

The city has the option of a direct placement of the RANs as GO revenue anticipation promissory notes due to the reduced liquidity of the municipal debt market. The planned sale otherwise does not carry a GO pledge. The notes mature Dec. 31 so a slightly higher rate could be managed, but the city wanted to be prepared in the event buyers could not be found.

“The RANs are important every year for the cash flow of the city. In today’s uncertain times, if Plan A fails, you don’t want to be scrambling at the last minute to figure out a Plan B,” Li said.

In the event of a delay, the city has other near-term options to manage for a few months without a direct placement.

PFM Financial Advisors LLC is advising the office. Katten Muchin Rosenman LLP and Hurtado Zimmerman SC are bond counsel.

The city faces uncertainties over the expense for its management of COVID-19 and longer-term economic fallout that could impact the city’s ability to replenish reserve draws used to balance recent budgets.

The city is stressing the steadiness of revenues that make up the majority of its budget.

“We are not economically disadvantaged because of the virus,” said Matson, who decided to retire and is not seeking a third four-year term in the April 7 election. “Our revenues are fairly stable which is always a positive but at the same time we are limited with our revenue” options.

As Matson noted, that resilience of the revenue sources can have a downside as it limits the city’s growth prospects. The city is facing rating hits if it continues to draw down reserves and doesn’t structurally balance its books.

“Finding new revenues or expense cuts will be needed to preserve the city’s rating over the long term," S&P said.

“Should the city be unable to address its continued budget shortfall in an expedited fashion, either through materially significant expenditure reductions or increased revenue, the rating could be lowered, potentially by multiple notches,” S&P said.

“Fitch expects the city's two largest sources of revenue, state aid and property taxes, to remain stagnant or grow below the level of inflation. The city's independent legal ability to raise revenues is constrained by state law. The vulnerability to state fiscal conditions is offset to a degree by its ability to independently increase other non-tax revenue sources,” Fitch said.

COVID-19 disclosure is prominently displayed early in the offering statement.

“At this time the major expenditure is the city’s health department costs to identify, track, monitor, and treat persons infected by the virus,” the disclosure says. Costs are also expected due to personnel exposed to or suffering from the virus and “disruption of city operations.”

On revenues, the disclosure says “the majority of the city’s revenue sources are fairly stable and not materially affected by economic activity” with between $10 million and $20 million “considered somewhat affected by a decline in the economy… the city does not receive sales tax revenue.”

The city also expects some aid for COVID-19 expenses from the $150 billion allocated to state and local governments in the $2.2 trillion federal Coronavirus Aid, Relief, and Economic Security Act.

Wisconsin is expected to receive $2.3 billion from the CARES Act with about $260 million earmarked for local governments, according to the Center on Budget and Policy Priorities. Milwaukee has a population of nearly 600,000 so it meets the threshold for local city and county government aid of 500,000 or more. The city could be in line for about $100 million, market participants have told the city, which city officials said would cover expenses.

"The negative outlook reflects our view of the city's continued substantial downward trajectory of the city's available reserves in recent years due to weakened operational performance," said S&P analyst David Smith.

“The city has been drawing on reserves to fund operations for the last three years — reducing its financial resilience cushion. The availability of the public debt amortization fund only partially offsets this concern,” Fitch said.

The city drew $16 million from its fund balance in 2019. Plans to replenish up to $10 million were hurt because of added health-related and overtime expenses. The city is drawing $10 million from the fund balance in 2020 with hopes of replenishing it when the books are closed but COVID-19 fallout could make that harder.

As he prepares to retire, Matson said he’s proud of his team and its ability to control expenses and manage debt programs. Managing pension costs with decisions on funding looming in the new few years and identifying new revenue streams are primary challenges the city’s fiscal prospects, Matson said. The city and county continue to press for state legislative approval to ask voters for a sales tax hike but the Republican-controlled legislature has so far blocked the effort.

The annual spring sale was planned slightly earlier than usual to account for the scheduled election date for the city’s elected officers including the mayor and comptroller. The hope was to close with current officers in place to simplify the administrative process.

Winners of the election are sworn in two weeks after the election. Whether the election — which includes state's presidential primary and ballots for many local governments — will take place as planned may be decided by the courts.

Other states with April primaries have delayed them because of the coronavirus pandemic.

A federal judge Friday dismissed a lawsuit filed by Green Bay seeking to delay the election on the argument that it endangered public health.

Gov. Tony Evers has issued a "Safer at Home" order barring nearly all public and private gatherings.
Other groups have filed litigation challenging the date. State leaders have said the election is expected to proceed but the state elections commission says more than 1,000 local governments have warned of poll worker shortages and some believe the state Supreme Court may have the final word.

Deputy comptroller Aycha Sawa, a 10-year veteran of the office, and state Rep. Jason Fields, who heads up a venture capital firm, are running to replace Matson.

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