City of Milwaukee’s Credit Rating Cut Again

The City of Milwaukee’s financial woes are drawing notice from the major credit ratings and, as a result, the city is likely to spend more on its regularly-issued debt.

Two of the three major credit rating agencies cut Milwaukee’s bond rating in November. The third agency already cut the city’s rating in September.

All three have a negative outlook, an indicator that future cuts are possible.

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 fully fund its pension system. 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.

The rating agencies want to see a long-term plan.

“The negative outlook partially reflects Fitch’s concern that the city has not yet presented a plan to fund the higher pension contribution costs in the long run, although the increase in the pension reserve fund provides temporary breathing room,” said Fitch in April and November ratings. But by November, Fitch cut the city’s rating two notches, from AA- to A.

The cut drops the city from “high grade” to “upper medium grade” and only four notches above junk. The rating agency, in assigning grades to different factors, is the most concerned about the city’s inability to raise revenue. It last cut Milwaukee’s rating in 2019 and maintains the highest grade of the three agencies.

S&P Global also cut the city’s rating in November, moving it down one notch from A to A-. It also cut the rating on sewage revenue bonds to BBB+ from A-, but assigned a stable outlook.

“The lowered rating reflects our view of the city’s budgetary flexibility profile, which is trending towards very weak levels, with severely limited revenue-raising flexibility options,” said S&P analyst Andrew Truckenmiller to The Bond Buyer.

S&P previously cut the city to AA- in 2019 and A in 2020. The next cut would move it to “lower medium grade.”

Moody’s, which operates on a different scale, is holding the city at A3, the equivalent of S&P and Fitch’s A-. It has downgraded the city’s credit rating four times 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 A3 in September.

During a September budget briefing, city capital finance manager Joshua 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.

Starting in 2024, the city will need to fully fund its pension system as part of a five-year smoothing formula. The annual funding needed is expected to grow by $50 million to $70 million, the latter of which would effectively double the current contribution. A final figure is expected in spring 2023.

It will have approximately $80 million in federal funds that in 2024 to blunt the impact, but then faces a $150 million structural deficit in 2025. It also has approximately $80 million in a pension reserve fund.

The city’s pension system is 83.4% funded, an amount that exceeds many other public funds says a recent Wisconsin Policy Forum (WPF) report. But it needs to be 100% funded based on a series of regulations that govern its operation.