OREANDA-NEWS. Fitch Ratings has assigned ratings to the following:

--Milwaukee Public Schools (MPS), WI implied unlimited tax general obligation bonds (ULTGOs) 'A+';
--\$38 million federally taxable redevelopment lease revenue bonds series 2015A (MPS - Qualified School Construction Bonds [QSCB] - Direct Payment Subsidy) issued by the Redevelopment Authority of the City of Milwaukee, WI (the authority) 'A'.

The lease revenue bonds are expected to be sold via negotiated sale on June 24, 2014.

The Rating Outlook is Stable.

SECURITY

The QSCB lease revenue bonds are payable from lease payments made by the MPS to the authority for the right to use numerous school properties and improvements. The lease payments are scheduled to be sufficient to pay the debt service on the 2015A bonds.

KEY RATING DRIVERS

CREDIT QUALITY OF MPS: MPS is statutorily a department of the city of Milwaukee (the city; rated 'AA' Stable Outlook) with its own taxing and budgetary powers. The lease rating is based on the credit quality of MPS and notched from the implied ULTGO.

MODERATE ENROLLMENT DECLINES: MPS enrollment has been pressured by competition, impacted by population demographic changes and fallen 15% over the past decade.

HIGH DEPENDENCE ON STATE FUNDING: Similar to most lower-income school districts, the majority of the annual budget is derived from state funding.

MINIMAL ADDITIONAL REVENUE FLEXIBILITY: MPS is consistently at or minimally below its statutory property tax revenue limitation.

VULNERABLE BUDGETARY PERFORMANCE; LIMITED RESERVES: Budgetary balance has been challenged over the past few years due to declining revenues resulting in several modest general fund deficits. Reserves remain limited and further declines would be a credit negative.

ABOVE-AVERAGE DEBT: The MPS debt profile exhibits above-average debt ratios, moderate carrying costs and slow amortization.

REGIONAL ECONOMIC CENTER: MPS serves over 81,000 students in the economic engine and employment center for the surrounding region. The city's economy has begun to show signs of post-recession recovery but continues to be somewhat weaker than state and national averages.

WEAK LEASE STRUCTURE: While there are limited outs for MPS not to pay lease payments, the structure lacks bondholder security interest in the facilities, and loss of use of the facilities upon non-payment. Only the loss of quiet enjoyment/material disturbance to all of the properties and improvements would legally allow non-payment by MPS under the lease.

RATING SENSITIVITIES

BALANCED OPERATIONS AND RESERVE MAINTENANCE: The rating is sensitive to MPS' ability to maintain sound budgetary control and adequate reserves.

ECONOMIC AND ENROLLMENT TRENDS: The tax base, employment and enrollment trends will be key to future credit evaluations.

CREDIT PROFILE

MPS is coterminous with and serves the city of Milwaukee. MPS is the largest school district in the state of Wisconsin, encompassing a 97-square mile area located adjacent to Lake Michigan, 90 miles north of Chicago. While the city's population of nearly 600,000 has shown stability or marginal growth since the 2000 census, reversing a multi-decade trend of decline, district enrollments have been pressured by competition and city demographic changes resulting in a 5% decline in school-age residents. Total enrollments have fallen from a peak of over 100,000 in 2001 to 81,744 in 2015.

VULNERABLE BUDGETARY BALANCE AND LIMITED RESERVES

The district continues to face budgetary pressure from declining enrollments driven by charter school competition which results in state funding decreases. State revenues comprise 60% of the district annual budget. Property taxes are 25% and subject to statutory revenue limitations leaving minimal additional revenue raising flexibility.

MPS has managed revenue declines with expenditure reductions and modest use of general fund balance over the past five years with the exception of fiscal 2013 which reduced general fund balance by a sizable \$17.4 million (1.5% of spending). The large deficit and drawdown was due to several items including a \$10 million decrease in federal revenues (from the end of the ARRA program), \$15 million for a 3% pay raise to teachers and educational staff and a one-time retiree severance payout of \$2.7 million offset in part by cost savings in healthcare. MPS returned to balance in 2014 and projects balance for 2015 with ending unreserved general fund balance of approximately \$52 million or 5% of budget. Fitch believes the outlook for fiscal 2016 is stable given modest projected improvement in enrollment, a projected \$12 million decline in the state funding (proposed flat revenue limits and elimination of general aid of \$150 per student), a modest increase in property taxes based on tax base growth coupled with flat expenditures and careful management oversight.

STRONG RELATIONSHIP WITH CITY

The relationship between the management teams is strong and beneficial to MPS. MPS is a department within the city with independent board and budget and separate financial reporting. MPS has an independent property tax levy subject to state statutory revenue limitations. The city administers the property tax levy adopted by MPS, acts as treasurer for MPS cash and issues debt for the benefit of MPS for the purchase of sites and buildings and cash flow.

REGIONAL ECONOMIC ENGINE AND EMPLOYMENT CENTER

The city serves as the economic engine for the surrounding region and has a fairly diverse economic and employment base despite lingering economic stress. The local economy maintains a reduced but still above-average reliance upon manufacturing that has created vulnerabilities to recessionary employment shifts historically.

The city's unemployment rate remained elevated at 7.3% in March 2015, well in excess of the state and national rates of 5.4% and 5.6%, respectively, but down from a high of over 12% in 2010. The city's unemployment rate decline is attributable to annual employment growth that has exceeded labor force gains in three of the past four years. Resident employment in 2014 remained about 4% below 2007's pre-recession high despite this improvement in the labor market.

The city recorded several years of recessionary tax base declines and market value now stands 19% below the 2009 peak. In 2014 the tax base grew by a very modest 0.2% and preliminary city assessor data indicates estimated growth of 2.7% for 2015. This expected growth is supported by several large, multi-year construction projects underway that indicate modest tax base growth is likely to continue.

Resident socioeconomic indicators are well below average with per capita income levels at 70% of the state-wide average and individual poverty rates more than double that of the state. Education levels are also below average, with 22% of the adult population achieving a bachelor's degree versus 29% nationally.

ABOVE AVERAGE BUT MANAGEABLE DEBT

MPS has utilized various loan and lease financing structures as it does not have the authority to issue debt. The city has issued debt on behalf of MPS, approximately \$98 million GOs outstanding currently. The authority has issued several series of bonds to fund MPS projects (\$76 million) and pension obligations (\$180 million) backed by MPS repayment obligations for which MPS payment obligations are derived from operational monies with the budget and the intercept of state aid payments received by MPS from the state. The series 2015 bond issue does not benefit from any intercept mechanism.

Overall debt ratios are moderate at \$3,136 per capita and above average at 7.2% of market value. Overall MPS-related debt amortization is slow at 40% in 10 years due to the CAB structure of the pension bonds and bullet maturity of the QSCBs. The debt profile is further challenged by significant negative value under interest rate swap agreements which totaled \$42.7 million on a \$130 million notional amount in 2014. Planned capital needs are manageable and near-term borrowing plans include \$35 million additional QSCBs for schools within the next five years.

MPS long-term liabilities related to employment benefits are generally weak although MPS participates in the well-funded state and city pension plans. The pension bonds issued in 2003 retired an MPS unfunded actuarial accrued liability (UAAL) owed to the state agent multi-employer retirement plan for MPS employees. Additionally, MPS provides two supplemental defined benefit plans, one of which is funded at a low 50% with a manageable UAAL of \$288 million in 2014. Annual pension payments totaled \$71 million in 2014, not including pension bond costs.

MPS also has significant other post-employment benefit costs OPEB) For 2014 MPS paid \$110 million in OPEB costs on a \$93.5 million annual required contribution (ARC). In September 2014, MPS adopted amendments to the health insurance program for Medicare eligible retirees to take effect Jan. 1, 2015. The changes are estimated to reduce the estimated annual pay-go costs by \$10 million annually and the unfunded liability by 18% to 4.4% of market value. MPS established an OPEB trust in 2010 which had \$93.8 million of assets at June 30, 2014.

Carrying costs for debt service, pension and OPEB are moderate, amounting to 17% of governmental fund spending in 2014.

WEAK LEASE STRUCTURE

Fitch views the lease structure and provisions as weak; thus the strong project essentiality has little importance to the rating.

MPS, the city and the authority will enter into a cooperation agreement to provide for the redevelopment of real property and improvements which will include 30-plus sites. The city and MPS will lease the real property to the authority under a ground lease. The city currently holds title to the properties on behalf of MPS. The authority will lease the real property and improvements to MPS. Rental payments will be made by MPS under the lease in amounts sufficient to pay debt service on the bonds including required sinking funds. The authority has assigned its rights to receive the rent payments and other rights under the lease to a trustee. The lease is net lease to MPS with no right of set-off and at the end of the lease MPS may purchase the properties and improvements for \$100.

The rental payments under the lease are general expenses of MPS. The lease does not include a MPS covenant to appropriate the lease payment, as it would constitute a debt for which MPS has no authority. MPS must notify the authority and the trustee if the lease payment is not included in its annual budget. MPS has included amounts in its adopted 2015 and 2016 budgets, and has historically adopted its budgets in a timely fashion.

Under the lease, the only allowable condition for MPS non-payment is in the event that MPS loses quiet enjoyment and experiences material disturbance at all 30-plus properties and improvements. While this appears to be a remote risk, rights and remedies upon a non-payment by MPS are weak. In that event, there are no rights to evict MPS or retake the properties and improvements. To somewhat mitigate this risk, lease payments are paid in arrears such that MPS has already enjoyed use of the properties and improvements and therefore has no right for non-payment. The intention is to maintain MPS's quiet enjoyment of the properties and improvements such that there is never a condition for MPS non-payment. In the event there is loss of quiet enjoyment and material disturbance to all of the properties and improvements, the authority can retake the properties and improvements and release or sell. In the event of non-payment by MPS for any other reason, the authority and/or trustee could seek legal recourse in court to receive payment for rent on properties and improvements that MPS has already used. If MPS received the beneficial use of the properties and improvements, rental payments are owed.

The lease weaknesses offset in part by strong lease payment history results in notching of the lease rating below MPS's underlying general obligation credit.