CHICAGO – Milwaukee will take competitive bids on $200 million of notes and bonds Tuesday to raise funds to smooth out cash flow and finance capital projects.
The sale includes $100 million of general obligation cash flow notes that mature in December, $86 million of GO promissory notes that mature between 2014 and 2023, and $18 million GO bonds that mature pick up after the promissory notes mature and have a final maturity of 2030.
The cash flow notes smooth out city operations ahead of the receipt of state aid while the other pieces of the transaction will raise new money for road, bridge and other projects and refund about $12 million of outstanding debt, said city comptroller Martin Matson.
Katten Muchin Rosenman LLP is bond counsel and Public Financial Management Inc. is financial adviser. With the state in the market also on Tuesday with a competitive GO sale, the city has pushed back its bidding to 11:30 A.M. Central Time.
The city has set new a bid perimeter on the promissory notes and bonds that establishes a maximum bid price of 120 % of par value plus accrued interest. The city also sets a maximum 5 % coupon requirement.
Combined, the two features should prevent bidders from putting too much premium on the front end of the deal to artificially lower the true interest cost that determines the winning bid.
Because the city rapidly amortizes its debt, higher premiums early on impose steeper repayments on the city.
“We repay our debt real quickly and we want the debt service to match the revenues of the city,” said Richard Li, the comptroller’s public debt specialist. Li said he had been concerned that without new requirements bidders could manipulate the TIC with high coupons up front, and discounts further out.
Ahead of the sale, Standard & Poor’s affirmed the city’s AA GO rating. Moody’s Investors Service had not yet rated the deal, but has an existing rating of Aa2 on the city’s GOs.
Standard & Poor’s said the rating reflects the city’s status as the economic hub of southeastern Wisconsin; its diverse employment base with strong service and manufacturing sectors; strong general fund reserves; and a moderate overall net debt burden.
The agency describes the city’s credit challenges as its above-average unemployment rate, adequate but below-average income levels, and financial operations that are constrained by flat to declining state aid and a state-imposed levy cap. Milwaukee relies on state revenue sharing for about 40% of its general fund revenues.
The city budgeted for the loss of about $10.3 million in state revenue sharing in 2012 and balanced its budget through the use of reserves from its designated tax stabilization fund. The city expects a general fund surplus of $15 million due to charges and fees and other revenues that have come in above budgeted projections and health care costs that are below estimated costs.
The city’s population stabilized based on the 2010 census at 595,000 after falling 17% from 1970 to 2000. Its estimated property tax base value fell 18% from 2008 to 2012 to $26.4 billion which Standard & Poor’s said was adequate at about $44,380 per capita. The city’s pension system is 96% funded. Its retiree healthcare unfunded liability was $916 million. A task force is exploring how best to address the healthcare liability.
“Overall we believe we have a very stable outlook going forward,” Matson said of city efforts to control expenses.
The city plans a series of deals this year including a roughly $30 million to $40 million sewer revenue bond sale. Standard & Poor’s rates that program AA-minus based on the city’s pledge to make up any deficiency in system revenues. It will issue about $38 million of qualified school construction bonds on behalf of Milwaukee Public Schools and school cash flow notes later in the year. The city also is establishing a line of credit with PNC Bank as a backup liquidity facility if cash is needed quickly, Li said.
