Milwaukee’s Credit Rating Cut

The three major credit rating agencies have taken notice of the City of Milwaukee’s increasingly dire financial situation. Moody’s downgraded the city’s credit rating from A2 to A3 earlier this month, while all three agencies maintain a negative outlook on the city.

Credit rating downgrades raise the city’s borrowing costs, further compounding the city’s financial issues. Coupled with rising interest rates, the city’s cost to borrow is growing at the same time its need for borrowing is growing.

The city is staring down a fiscal cliff induced by a decline in state shared revenue, state limits on new revenue sources and a looming need to spend more than $100 million annually to fund the pension system fully. While Mayor Cavalier Johnson attempts to negotiate a deal with the Wisconsin State Legislature, the city is attempting to avoid the cliff for two more years by exhausting its remaining American Rescue Plan Act grant.

It’s the fourth time Moody’s downgraded the city’s credit rating in the past decade. In 2012, Moody’s gave the city an AA2 rating, before cutting it to AA3 in 2014, A1 in 2018, A2 in 2020 and now A3. It’s the lowest rating on the three major company’s scales. S&P Global maintains an A rating after two cuts (to AA- in 2019 and A in 2020). Fitch maintains an AA- rating after cutting it in 2019.

“We are on the negative outlook for all three,” said Comptroller Aycha Sawa. The outlook suggests that more cuts could come if changes aren’t made.

“The reason they described to me for the negative outlook is they don’t see a plan going forward,” said city capital finance manager Joshua Benson during a briefing on the City Comptroller’s budget Thursday morning. He said a plan would improve the situation.

“Most people find this as interesting as paint drying, no offense,” said Alderman Michael Murphy, who definitely isn’t one of those people. “The reality is it has an impact as far as our borrowing.”

Benson estimated that each time the city gets moved down a notch, its borrowing costs grow by five basis points (0.05%). Moving levels (such as from AA to A) costs an additional 15 to 30 basis points. Assuming all of the city’s $1.2 billion in outstanding debt had to be reissued under a notch lower score on a 10-year term would mean borrowing costs would grow by a minimum of $3 million.

The city’s debt, however, comes in many forms and is secured by different revenue streams (like tax incremental financing districts). There is also another key point as it relates to the latest downgrade. “We don’t utilize Moody’s on new bond issuances,” said Benson. He said the policy to market the debt using the other rating agencies was adopted in 2016 by then-comptroller Martin Matson. The strategy has paid off for now, as Moody’s holds the lowest rating after lining up the differing scales.

And while the city expects to spend a record $325.1 million on debt service next year (including $98.5 million on property-tax-levy-supported debt, a 15.3% increase), Benson had a sliver of good news. “We will actually retire slightly more [debt] than we issue over the next three years,” said the finance manager. The retirement pace, said Benson, is due to the city’s larger capital plan. Milwaukee routinely borrows and retires more than $100 million in general obligation debt annually.

A copy of the city debt budget report presented Thursday is available on Urban Milwaukee.