Milwaukee Loses Its ‘A’ Credit Rating, Costing Millions

Milwaukee City Hall. Photo by Jeramey Jannene.

Credit rating agencies continue to take notice of the City of Milwaukee’s declining fiscal situation. And as a result, they’re continuing to make it more expensive for Milwaukee to borrow money.

Fitch Ratings slashed Milwaukee’s credit rating Tuesday to BBB+ (lower medium grade) from A (upper medium grade). The new rating is only three levels above junk-bond status. As recently as 2019, the city was given an AA rating (high grade), two notches below the top of the chart.

If sustained over a 10-year period, the rating downgrades would add tens of millions of dollars to the city’s borrowing costs.

And things could still get worse. Fitch maintained its negative outlook designation for the city.

“Fitch’s downgrade… reflects the city’s large and growing structural budgetary imbalance driven by statutory revenue-raising constraints, escalating municipal cost pressures, especially for pensions, and reliance on state shared revenue that has not kept pace with inflation,” says Fitch’s rating commentary. “The rating and negative outlook also reflects Fitch’s belief that the recently proposed state legislation boosting local funding may not be sufficient to minimize the budgetary imbalances in the near-term, forcing the city to make meaningful cuts to public safety service delivery to close a sizable budget gap estimated at approximately 21% of spending.”

The City of Milwaukee faces a $156 million structural deficit in 2024, driven by rising pension costs, a state prohibition on enacting new revenue sources or increased property tax revenue and long-flat shared revenue payments, the state system to rebate income tax payments to municipalities. For several years, city officials have been modeling out scenarios that would involve laying off up to one-in-four workers to keep the city afloat.

The city would receive a 2% sales tax as part of a larger local government funding proposal pending in the Wisconsin State Legislature. A Wisconsin Department of Revenue report loosely estimates the city would receive $193.6 million annually from the new tax. Milwaukee would also receive an additional $21.75 million annually in shared revenue. But the sales tax, as currently proposed, would need to be adopted via a referendum and the funding would come with substantial restrictions on seemingly unrelated policy matters.

The fact that the city’s revenue constraints are largely imposed by the state hasn’t gone unnoticed. “Fitch expects the city’s two largest sources of revenue, state aid and property taxes, to remain stagnant or grow below the level of inflation. The city’s independent legal ability to raise tax revenues is highly constrained by state law,” says the analysis. That doesn’t mean the city gets a higher score, though: Fitch gave a BBB score to the city’s “Revenue Framework” and also gave a BBB score to the Expenditure Framework because cost growth is expected to exceed revenue growth.

There is some relatively good news buried in Fitch’s analysis. The city was given an AA grade for its long-term liability burden. “Milwaukee’s long-term liabilities are a moderate burden on the city’s resource base at approximately 15% of personal income,” says Fitch’s analysis. Its operating performance also earned an A. “The city had significantly drawn down on available general fund reserves due to four consecutive years of operating deficits prior to the pandemic. Reserves increased due in large part to the issuance of notes in 2020 and federal pandemic-related aid,” says the analysis. The city, largely through accounting maneuvers from a $394.2 million COVID-19-era grant, has placed approximately $80 million in a pension reserve fund to soften any future blow.

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 high-grade AA to upper-medium-grade 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. Under a hypothetical scenario of reissuing all of Milwaukee’s debt at the 2023 rating versus 2019, the city’s borrowing costs would grow by $33 million to $51 million.

The latest rating update came as the city issues $67.6 million in general obligation promissory notes and $22.4 million in general obligation bonds. The city routinely issues and retires debt as part of its operation.

Fitch last cut the city’s rating, from AA- to A, in November. Of its peers, which include Moody’s and S&P Global, Fitch now has the lowest rating for the city. S&P did not downgrade the city’s rating in its latest review.

UPDATE: An earlier version of this article said S&P hasn’t rated the city since 2022. It hasn’t cut the city’s rating since 2022.