The rating on the City of Milan is based on the municipality's strong, diversified economic base; expected low deficits before debt retirement in the coming years; and increased revenue dynamism anticipated from recent changes in Italian cities' revenue stream. The rating also reflects Milan's heavy debt burden, as well as its limited revenue flexibility owing chiefly to the municipal government's unwillingness to increase tax rates. The latter factor is offset to some extent by the city's extensive assets, which provides significant resources in case of need. Higher-than-expected operating-spending growth--coupled with sluggish revenues--has led to a deterioration of Milan's operating margin, to only 2.5% of operating revenues in 2001, which is low for an 'AA'-rated entity. Milan should return to higher
