Milwaukee’s Bond Rating Cut Two Levels

Milwaukee has spent down its debt reserve fund in recent years, a move intended to alleviate other budget issues that now could end up costing the city.

S&P Global cut its bond rating for the city by two levels from AA- to A, which moves the city from “high grade” to “upper medium grade” on the agency’s credit rating scale.

Mayor Tom Barrett disclosed the downgrade during his budget address on Tuesday morning. “S&P Global noted that we have been drawing down our reserves. As you know, we’ve done so to maintain our vital services without any growing revenue,” he said.

But, as Urban Milwaukee reported Monday, the city drew down too much. The Comptroller’s Office lost track of an earmark for a balloon payment due in 2025, resulting in the fund falling short of the necessary funding to cover the debt payments. The city will need to allocate an additional $8.6 million in 2021 to replenish the fund just to avoid defaulting on those payments.

“It will probably have an impact on how much it costs us to borrow money,” said Barrett in a press briefing after the address, noting that the change makes the city’s debt less attractive to investors.

The reserve fund, according to budget director Dennis Yaccarino, has gone from approximately $70 million in 2013 to $12 million in 2020. The 2020 budget calls for $267 million in debt service costs, of which $73.5 million comes from the property tax levy.

Deputy comptroller Joshua Benson told a Common Council committee last week that the city was on a “negative watch” from the agency and had a two-thirds chance of being downgraded. He said the size of the reserve fund was one of many things the rating agencies consider. Alderman Nik Kovac asked for a model to be created to show the impact of different funding levels.

“The downgrades reflect our view of the continued erosion of the city’s available reserves, which have declined substantially in recent years because of weakened operational performance,” said S&P Global credit analyst David Smith in a rating anouncement. “The negative outlook reflects our view of at least a one-in-three chance of a lower rating during the outlook period based on continued fiscal pressures driven by the COVID-19 pandemic and recession and an ongoing stagnant revenue environment.”

Barrett, who must propose a budget that is then amended by the council, has repeatedly vetoed additional borrowing increases created by the council. The council has overridden most of those vetoes.

“For four consecutive years, the council has added to the borrowing beyond what I have put in my budget. Council members have seen the concern I expressed in numerous veto messages. That added borrowing added $500,000 per year in debt service, scarce tax levy funds that could have been available now for critical services,” said Barrett. “The change this week in the City’s bond ratings should drive home this point even more forcefully. Any decision you make adding additional borrowing in this budget will simply make it more difficult for us in the future.”

The city has made a number of changes to its debt reserve fund since 2013.

“At the time premiums were going back into the debt service fund instead of lowering the amount of borrowing we did,” said Yaccarino last week. Debt associated with tax incremental financing, where upfront borrowing is repaid by increased property tax revenue from specific properties, was also moved into its own fund. Approximately $31 million will be transferred to retire TIF debt in 2020.

Independently-elected Comptroller Aycha Sawa, with the office since 2010 but first elected to the top position in April 2020, endorsed the changes during a council committee last week and placed the blame for the missing payment on her predecessor Martin Matson.