Fitch Rates Milwaukee Metropolitan Sewer Dist (WI) Promissory Notes ‘AAA’ and Affirms GOs at ‘AAA’
By Business Wire News
Fitch Ratings has assigned an ‘AAA’ rating to the following unlimited tax general obligations (GO) of Milwaukee Metropolitan Sewer District, WI (MMSD, the district):
–$100 million GO promissory notes, series 2015A.
The proceeds of the notes will be used to finance the costs of various capital improvement projects. The notes are expected to sell competitively on April 20, 2015.
In addition, Fitch affirms the following ratings:
–$233.8 million in unlimited tax GO bonds at ‘AAA’.
The Rating Outlook is Stable.
The notes and bonds are supported by the full faith and credit and unlimited taxing power of the district.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: The ‘AAA’ rating reflects the utility’s role as a large regional sewer service provider, its stable operating profile, and its ability to levy ad valorem taxes for capital-related spending and debt service.
BROAD, DIVERSE ECONOMY: The service area is an economic engine for the state with a broad and diversified economy although post-recession recovery has been slow. District tax base growth has turned modestly positive following several years of declines.
BELOW AVERAGE SOCIOECONOMIC INDICATORS: Per capita income and market value levels are below average. The unemployment rate remains somewhat elevated, typical of areas historically dependent upon manufacturing. The region’s economy has an above-average manufacturing presence which has experienced modest positive improvement over the past year.
SOUND OPERATING PERFORMANCE: Long-term planning and prudent financial and debt policies support sound operating performance and competitive rates.
DEBT POSITION TO REMAIN SOMEWHAT HIGH: Fitch believes the district’s debt profile will not increase materially despite substantial capital plans through 2020, given the district’s annual pay-as-you-go (paygo) capital practices as well as rapid debt retirement.
MANAGEABLE PENSION AND OPEB: Actuarial pension funding requirements have been low, offset in part by increases in employee contributions. Future overall pension costs to the district should remain at manageable levels. Other post-employment benefits (OPEB) for the district are minimal.
The rating is sensitive to shifts in fundamental credit characteristics including the district’s strong financial management practices. The Stable Outlook reflects Fitch’s expectation that such shifts are highly unlikely.
The district is a regional government agency that provides wholesale wastewater treatment and flood management services for 28 communities (18 in the district and 10 outside) in the greater Milwaukee area covering 411 square miles.
STABLE REGIONAL ECONOMY
The Milwaukee County (ULTGO rated ‘AA+’, Stable Outlook) economy is broad and diverse with a large presence of education and health services. Durable goods manufacturing employment is at 177% of the national average in 2014.
The district’s economic base exhibited cyclical declines during the recent downturn but trends in overall employment and labor force over the past decade have been positive and in 2014 exceeded state and national growth rates. Both the county and metropolitan statistical area (MSA) unemployment rate show a marginal year-over-year decline, to 6.5% and 5.6% respectively for January 2015 but remain above state and national levels. Wealth and income levels are below national and state averages.
The district’s tax base is diverse and recorded a cumulative decline of 17.2% between 2009 and 2013. A 1.9% tax base increase has been realized for 2014. District officials’ tax base growth projections in their long-range financial plans range from 2% to 3% annually, which Fitch believes is optimistic in the short term.
REGULAR REVENUE INCREASES; STABLE OPERATIONS
The district’s cash position remains satisfactory, with $25.4 million or 109 days of unrestricted cash and investments on hand at 2013 year end, exceeding the district’s operating cash target. In March 2015, the district is averaging slightly lower but still sound 86 days cash on hand. Cash is down slightly following the return of prior year surplus to members but remains within the district’s target range of 60-90 days.
User charges are the primary operating budget revenue source and have remained low and stable for individual users and represent 89% of 2013 operating revenues. The district remains willing to raise user charges, up 3.25% in its proposed 2015 budget, and is projecting manageable user charge increases through its current long-term forecast. Rates and charges are not subject to regulatory approval. The average combined 2013 tax levy and user changes represent just under 1% of median household income, which is just below Fitch’s affordability threshold. Fitch believes that projected rate increases are manageable.
Budget surpluses are returned to retailers via a budgeted deficit in the following two years, which additionally helps to restrain user charge growth. Additionally, the district’s sale of its proprietary fertilizer, an economically sensitive revenue source, represented 9.8% of operating revenues in 2013.
Operating expenses net of depreciation remained stable in 2012 and 2013. The district selected a new operator, Veolia Water North America-Central LLC, through a competitive bidding process in 2008. The 10-year contract is expected to save $35 million across the life of the contract.
The district benefits from a dedicated unlimited property tax levied and collected by its members and contributions from 10 non-member communities restricted for capital expenditures. In fiscal 2013, these sources totaled $117 million or 1.10 times (x) principal and interest payments due in the same year.
The district is not subject to state tax levy limitations, and has shown a willingness to maintain or raise its tax levy to ensure continued adequate funding of its capital and debt programs. The district’s average annual levy increase from 2010 through 2014 was 2.6%. The district increased its tax levy by 2.85% in 2014 and approved a 2.65% increase in its levy with the 2015 adopted budget. Further, the district projects a 4% increase per year through 2020, which Fitch believes is manageable.
SUBSTANTIAL CAPITAL PLANS; MANAGEABLE DEBT
Fitch believes debt levels will remain stable at the relatively high level given a sizeable capital plan, rapid amortization and Fitch’s expectation that even little to no tax base growth should result in comfortably absorbing the additional debt within the district’s policy limiting direct debt to 2.5% of market value. The overall debt burden for the district is average at $3,327 or a high 5.7% of full market value. A significant 75% of outstanding debt is retired within 10 years.
The district’s $1.25 billion long range capital plan is comprehensive and includes enhancements to the water reclamation facilities, conveyance systems, and improvements to address inflow and infiltration.
The district is on schedule to complete its 2020 facilities plan, which the state approved in December 2007. The plan is led by improvements to the inline and interceptor conveyance system and water reclamation plants. The program includes an additional $264 million in GO bonds and approximately $132 million in additional clean water loans (all of which is repaid from the tax levy). The tax levy will provide $621 million and non-member billings $192 million.
The district is committed additionally to cash financing 25% of its long range capital plan through its tax levy and non-member community capital charges.
OTHER LONG-TERM LIABILITIES REMAIN AFFORDABLE
The district participates in the city of Milwaukee’s pension system, which is 95% funded on an actuarial basis, assuming an 8.25% rate of return. The funded ratio drops to 83% funded when adjusted by Fitch to reflect a 7% rate of return.
The district annually funds actuarially required pension payments which have been low over the past three years, most recently $1.4 million or 2% of the 2014 operating budget. Investment smoothing has resulted in an increase in the annual required contribution when no contribution was required. However, changes in state legislation now require the employees to make the 5.5% of payroll employee contributions, formerly made by the employer on their behalf, largely offsetting pension budgetary pressure to the district.
The district’s annual OPEB pay-go payment is moderate at $5 million (3% of 2013 budget) and its unfunded actuarial liability is a manageable 0.3% of market value.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘Revenue-Supported Rating Criteria’ (June 12, 2012);
–‘U.S. Water and Sewer Revenue Bond Rating Criteria’ (Aug. 3, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526