TEXT - Fitch affirms Milwaukee, Wisconsin Metropolitan Sewer District
Nov. 13 - Fitch Ratings affirms its rating on the following Milwaukee Metropolitan Sewer District, WI (MMSD, the district) securities: --$335,040,000 in unlimited tax general obligation (GO) bonds at 'AAA'. The Rating Outlook is Stable. SECURITY The bonds are secured 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 including its stable operating profile as a natural monopoly 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. The region's economy has an above-average manufacturing presence which has experienced good job growth over the past year. DEDICATED LEVY FOR CAPITAL AND DEBT: The district's capital and debt program benefits from the dedication of a property tax levy and non-member community capital charges. SOPHISTICATED MANAGEMENT: The district benefits from long-term operational and capital planning, prudent financial and debt policies and practices and a tenured management team. DEBT POSITION TO REMAIN AVERAGE: Despite substantial capital plans through 2020, Fitch believes the district's debt profile will remain relatively stable, given its pay-as-you-go (paygo) capital practices as well as rapid debt retirement. MANAGEABLE PENSION AND OPEB: Increases in pension funding requirements have been partially offset by increases in employee contributions, leaving future overall pension costs to the district at manageable levels. Other post-employment benefits (OPEB) for the district are minimal. CREDIT PROFILE The district is a regional government agency that provides wholesale wastewater treatment and flood management services for 28 communities in the greater Milwaukee area (18 in the district and 10 outside) covering 411 square miles. STABLE REGIONAL ECONOMY The Milwaukee County (ULTGO rated 'AA+', Stable Outlook) local economy is broad and diverse with a large presence of education and health services and an above-average durable goods manufacturing presence, at 177% of the national average in 2012. Year-over-year employment gains in the region's manufacturing sector, up 2.1% through August 2012, have helped to offset employment losses in most other sectors. Both the county and metropolitan statistical area (MSA) unemployment rate show a marginal year-on-year decline, to 9.4% and 8.2% respectively, due to labor force contraction outpacing employment declines. Wealth and income levels are below national and state averages. The district's $57 billion tax base is diverse and has generally fared well during the recession, recording a moderate 10% decline from its 2008 peak. District officials are projecting 2% tax base increases in their long-range financial plans, which Fitch believes is optimistic in the short term. DEDICATED LEVY FOR CAPITAL AND DEBT The district benefits from a dedicated unlimited property tax levy levied and collected by its members and contributions from 10 non-member communities restricted for capital expenditures. In fiscal 2011 these sources totaled $110 million or 1.2 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 2009 through 2012 was 1.7%. The district increased its tax levy by 1% in 2012 and adopted a 2.5% increase in its levy with the 2013 adopted budget. Further, the district projects a 4% increase per year through 2020, which Fitch believes is manageable. STABLE OPERATING PROFILE The district's operational risk to bondholders is limited because of the capital and operational budgets are separate and supported by property taxes and user fees, respectively. The district's cash position remains satisfactory, with $27.6 million or 123 days of unrestricted cash and investments on hand at 2011 year end, exceeding the district's operating cash target. User charges, the primary operating revenue source, have remained low and stable for individual users and represent 89% of 2011 operating revenues. The district remains willing to raise user charges, up 2% in its proposed 2013 budget, and is projecting manageable user charge increases through its current long-term forecast. The average combined 2012 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 9.1% of operating revenues in 2011. Operating expenses net of depreciation remained stable in 2010 and 2011. 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 but introduces some budgetary volatility as the district now bears 75% of the cost of commodities, which Fitch believes will be manageable. SUBSTANTIAL CAPITAL PLANS; MANAGEABLE DEBT The district's 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 district's long range capital plan, through 2020, totals $1.1 billion, led by improvements to the inline and interceptor conveyance system and water reclamation plants. The program includes an additional $254 million in GO bonds and approximately $212 million in additional clean water loans (all of which is paid from the tax levy). Overall debt burden for the district is average at $3,733 or 6% of full market value. With a significant 77% of outstanding debt retired within 10 years, the district's future debt burden should remain relatively stable through the district's capital program's remaining eight-year period, and Fitch expects the tax base to comfortably absorb the additional debt within the district's policy limiting direct debt to 2.5% of market value. The district is committed additionally to cash financing 25% of its long range capital plan, financed 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 96% funded on an actuarial basis, assuming an 8.5% rate of return, or 82.4% funded when adjusted by Fitch to reflect a 7% rate of return. The district's annual required pension payment is a low $1.6 million (2% of 2012 operating budget), representing full actuarial funding. Investment smoothing has resulted in an increase in the annual required contribution from recent years, when no contribution was required; however, changes in state legislation have increased employee contributions to 5.5% of payroll, largely offsetting budgetary pressure to the district. The district's annual OPEB pay-go payment is moderate at $4.8 million (6% of 2012 budget) and its unfunded actuarial liability is manageable, equal to 0.3% of market value.
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