Milwaukee’s Credit Rating Upgraded To A+

Milwaukee City Hall. Photo by Jeramey Jannene.

For the first time in several years, the top credit ratings agencies have delivered Milwaukee good news.

The City of Milwaukee’s credit rating has been upgraded, which could save millions of dollars per year by reducing the city’s long-term borrowing costs.

Fitch upgraded the city’s rating from BBB+ to A+ on Friday, pushing the city up three notches less than a year after it sounded alarm by slashing the rating to only three notches above junk-bond status and assigning a negative outlook.

Fitch, and its competitors Moody’s and S&P Global, have taken notice that Act 12 gave the city a 2% sales tax and increased shared revenue. All three now hold an “upper medium grade” rating.

“For the city of Milwaukee, Act 12 reversed a long-standing trend of flat or declining revenues (adjusted for inflation) and staved off deep public safety service cuts that the city was being forced to contemplate in fiscal 2024 before the passage of the legislation to address spending pressures including large increases in pension contributions,” said Fitch in a brief.

Act 12 was approved by the state in June and the Common Council approved the sales tax in July. The tax went into effect in January and then-comptroller Aycha Sawa estimated it would generate $184 million in its first year.

The other two ratings agencies have improved their ratings outlook for Milwaukee from “negative” to “stable,” but did not increase their rating. But both issued their latest evaluations before the city adopted its 2024 budget and already held a higher rating than Fitch.

In August and February, Moody’s retained its A3 rating, equivalent to A- on the Fitch and S&P scales. In October, S&P retained its A- rating.

All three agencies cited reserve levels as something being monitored to determine future ratings.

“We could take a negative rating action if Milwaukee is unable to sustain structural budgetary balance for any reason, leading to a decrease in available reserves,” said S&P in an October brief. “We could take a positive rating action if the city sustains structural budgetary balance and continues to improve reserves, while meeting its higher annual pension costs in 2024 and beyond.”

Newly-elected comptroller Bill Christianson, previously the deputy under Sawa, will need to work with the administration and council during the upcoming budget debate to determine the appropriate reserve fund balance to establish for the sales tax. Sales tax revenues grow faster in a booming economy, which will partially counteract the state’s property tax restrictions. But unlike property tax collections, sales tax revenues can rapidly plummet in a downturn and quickly cause budget shortfalls.

And neither the ratings upgrades nor the sales tax mean Milwaukee is without fiscal issues. The city is still expected to face structural fiscal issues going forward due to cost increases outpacing state-allowed revenue increases and the expiration of a federal American Rescue Plan Act grant.

The state’s credit rating remains far above the city’s. In February, S&P rated the state’s general obligation debt offering at AA+, one notch below its top grade AAA. AA+ is three notches above A+.

But until November 2022, the city was much closer to the state. Fitch cut the city from AA-, one notch above A+, to A as it warned potential bond buyers about the city’s financial position. As recently as 2019, it held an AA rating.

During a September 2022 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.

Fitch’s latest upgrade of one level and three notches, should it hold through several debt issuance cycles, could save the city tens of millions of dollars. But if current interest rates hold steady, its borrowing costs would still be higher than they were in 2022.