CHICAGO – Milwaukee will take competitive bids Thursday on $180 million of revenue anticipation notes to smooth out the cash flow needs of Milwaukee Public Schools.
Public Financial Management Inc. is advising city comptroller Martin Matson's office, which serves as the issuer, and Katten Muchin Rosenman LLP is bond counsel. The deal carries top short-term marks from Fitch Ratings and S&P Global Ratings.
The notes are secured by an irrevocable pledge of school state aid payments and all school operations fund revenues for the 2016-17 fiscal year that are due and not yet paid to the city. Interest repayment is also secured by a pledge of surplus revenues from city's debt service fund.
The city's credit weighs heavily in MPS related ratings as MPS functions effectively as a city department based on state statutes and the city is custodian of MPS funds, although the district is governed by a school board.
"While the notes are not general obligations of the city, Fitch believes the city's management of the Milwaukee Public Schools' funds and provision of liquidity for MPS create a relationship that supports the highest long-term rating on the notes," Fitch wrote in its report on the sale.
Fitch said the city's long term AA rating reflects its stable financial performance, strong gap-closing capacity, and moderate long-term liabilities level.
"A demonstrated capacity to cut spending and sufficient financial cushion offset Fitch's expectation for limited revenue growth," analysts added.
MPS is challenged by declining-to-stagnant state aid, waning enrollment, and a contracting tax base, Fitch said.
The state distributes school aid five times a year based on an allocation formula. MPS received 15% of total state aid in September, 25% in December, 25% in March, 34% in June and 2% in July. The city treasurer holds the June state aid payment to pay principal of the RANs which are due Oct. 1, 2017. Coverage from the June payment is 1.26 times. In fiscal year 2015, state aid accounted for 60% of school general fund expenditures.
On the upcoming sale, the comptroller's office is shifting the final maturity to October from June and eliminating a December maturity that has been built into past RAN issues. The structure more closely mirrors one used before the 2008 financial crisis.
"With short-term interest rates on its way back to more normal levels, we are returning back to the way we financed pre-Lehman[which collapsed in 2008]," said Richard Li, debt specialist in the comptroller office. "It will allow us to maintain higher liquidity levels, and the rating agencies are happier that there is more time between the June state aid payment and maturity, just in case something delays the state aid payment."
