Fitch Rates Milwaukee County, Wisconsin's $31.6MM GOs 'AA'.

CHICAGO -- Fitch has assigned an 'AA' rating to Milwaukee County, Wis.' $31,595,000 general obligation (GO) corporate purpose bonds, series 2006A, which will sell competitively on March 9. The bonds are GOs of the County, which pledges its full faith and credit to levy unlimited ad valorem taxes. The corporate purpose bonds will finance various capital projects, including demolition of the courthouse annex and parking lot construction. The Rating Outlook is Stable.

The Milwaukee area economy continues to grow slowly and become more diversified. Manufacturing remains an important sector, but the service industry has grown at a faster pace. The County's employment base, reflecting manufacturing's influence, has remained flat in the past decade. The County's unemployment rate, after reaching its low point of 3.8% in 1999, increased gradually to 7.1% in 2003. More recently, the unemployment rate declined to 5.2% in December 2005, from 5.2% in December 2004. Over the long run, economic growth in the County has lagged the state and national rates and can exhibit more volatility due to manufacturing cycles.

The County, in conjunction with state welfare reform, has kept expenditure growth in line with revenue increases. Wisconsin Works, the State's welfare reform program implemented in 1998, has limited the County's service responsibilities and does not depend on local tax support. Also in 1995, the State eliminated the County's responsibility for general assistance grants to individuals. The most significant reform is the sale of the County hospital, which will limit the County's spending to the general assistance medical program. Other measures enacted in prior years include a 0.5% sales tax, tightened eligibility for indigent health care, and overall cost control.

Milwaukee County's financial position has been relatively stable over the past decade. Although the care management organization in the County's Department of Aging contributed to small operating imbalances in the last two fiscal years, the County has reorganized program eligibility, service delivery and monitoring within family care and health-related services. Most labor contracts are in place through 2006, with increased employee contributions offsetting some growth in benefit costs.

The general fund balance at the end of 2004 (December 31 year-end) totaled $9 million, or 1.2% of spending and transfers, compared with $14.4 million, or 1.9% of spending and transfers in 2003. Including other governmental funds, the County had an ending balance of $40.3 million or 4.7% of spending and transfers. More stringent financial management among all county departments should have led to a small general fund surplus in 2005. The Department of Aging-Care Management Organization (CMO), after being the primary factor in county shortfalls in 2003 and 2004, is now operating within its budget following a reorganization and strong financial management. Although the County anticipated a $1.8 surplus in the general fund for 2005, additional costs at the Department of Parks and Public Infrastructure is expected to produce break-even results for the year. Experiencing greater costs and fewer savings in healthcare, 2006 may produce similar results with corrective actions.

New state legislation, which became effective July 27, 2005, limits property tax levy growth for a two-year period to the expansion rate of the assessment base, but not less than 2% annually. While the limits apply to operating as well as other revenues, special allowance is made for GO debt service on bonds authorized before July 1, 2005: If scheduled debt service increases from the previous year, the levy limit is increased by the difference; for bonds authorized from July 1, 2005, there is no adjustment. Since offsetting revenues-i.e., sales taxes, tax increment revenues, special assessments, utility revenues and surplus revenues-are considered in the limits, a loss of offsetting revenues further tightens the limits. For debt issues authorized after July 1, 2005-including this issue-the debt service limits do not apply.

As a matter of policy, the County has not increased its property tax levy and should not have difficulty in adjusting to the new limits. In planning its operating budget, it anticipates the continuation of property tax limits through the five-year period (2007-2011). Considering that employee benefit costs may continue to grow in real terms and county pension contributions will increase, the County administration projects budgetary gaps of $53.8 million annually ($269 million for the period) must be eliminated by revenue increases or spending reductions.

The County's direct debt burden is moderate. Direct debt remains at 0.8% of fair market value and $475 on a per capita basis; overall debt is 4.2% of fair market value and $2,530 per capita. Although debt refunding issues this year will restructure some principal maturities, overall debt amortization remains rapid at 88% in 10 years. The five-year capital program (2006-2010) totals $357.6 million, but includes $75.3 million for airports which finance capital through revenue bonds. The County has reduced its outstanding debt in the last four years by 4% and usually finances about half of its capital needs through debt.

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