CHICAGO — In its third marketing attempt, Milwaukee on Wednesday will competitively sell $38 million of taxable general obligation qualified school construction bonds in a deal that will wrap up the city’s planned issue of $50 million under the federal stimulus program.
Officials are hoping the third time is the charm due to the federal rule revisions on QSCBs that allow issuers to shed the tax-credit structure for a direct-pay interest subsidy.
“We are expecting strong bids this time and no net interest costs,” said Michael Daun, deputy to Comptroller W. Martin Morics, whose office acts as issuer for city debt.
Proceeds of the 17-year bonds are earmarked for various capital projects and maintenance. Robert W. Baird & Co. is financial adviser. Katten Muchin Rosenman is bond counsel.
Milwaukee first entered the market on Dec. 9 with all $50 million structured as tax-credit bonds, but received only one bid that demanded a supplemental coupon higher than the 1.5% maximum the city was willing to pay in addition to the tax credit.
The tax-credit qualifying interest rate was set daily by the U.S. Treasury Department based on a review of a pool of bonds, but investors at the time were demanding an issuer supplement.
Milwaukee rejected the bid and returned the following week, allowing for partial bids. It received more interest, but decided to sell just $12 million at a supplemental yield of 1.48% as the remaining bids exceeded the city’s maximum. Milwaukee — which is required under Wisconsin law to initially try a competitive sale — planned to shift to a negotiated sale, at a later date, due to the prevailing belief that the bonds would be more affordably placed through negotiation.
The March jobs bill approved by Congress allowed for issuers of QSCBs and qualified zone academy bonds to have roughly 100% of their interest costs subsidized by direct payments from the federal government.
“That really simplified the process for us” due to market acceptance for taxable, direct-pay subsidy bonds, Daun said.
The city has no near-term plans for tapping Milwaukee Public Schools’ remaining QSCB allocation or issuing any other long-term debt for the district, as future borrowing needs have yet to be determined by the district’s incoming superintendent, Gregory Thornton.
The school district is struggling both financially and academically. Thornton’s proposed $1.3 billion budget for the next fiscal year eliminates 682 positions, including 260 teachers, and closes eight schools to deal with rising costs and dwindling aid.
Ahead of the sale, which carries the city’s GO rating, Fitch Ratings downgraded the credit to AA-plus with a stable outlook. Fitch had recently recalibrated the rating up to AAA with a negative outlook.
Moody’s Investors Service recalibrated the rating to Aa1 with a negative outlook from Aa2 with a negative outlook. Standard & Poor’s affirmed the city’s AA and stable outlook. Milwaukee will have $839 million of GO debt after the sale.
“The downgrade reflects weakening in the city’s economic base, as evidenced by high unemployment rates, job losses, and taxable property value declines,” wrote Fitch analyst Melanie Shaker. “While Milwaukee’s economy remains large and diverse, the current recessionary impact reveals greater cyclicality than Fitch previously believed. Fitch expects that recovery will lag the U.S. given the lack of improvement in economic statistics so far this year.”
Mayor Tom Barrett’s 2010 budget cut spending and included union wage concessions to stave off layoffs. After several years of draws on its general fund balance, Milwaukee was able to close out the year with a $24 billion surplus. Any surplus goes into a tax stabilization fund — considered the city’s undesignated fund balance. The fund held $20 million in 2008.
Milwaukee continues to struggle with flat growth in state aid, which at $272 million accounts for nearly half of its general fund — and has seen a flattening of its property values. The city’s credit benefits from strong fiscal management, a 99% funded ratio of its pension, and a diversifying economy. The city faces an $800 million unfunded liability for other post-employment benefits and is considering options for addressing it.
Moody’s wrote of its negative outlook: “Financial flexibility will continue to pose a challenge for city management as revenue-raising opportunities are limited.”
