Bonds

Milwaukee hit with two-notch downgrade over budget pressures

Pending state legislation that boosts Milwaukee’s revenue raising prospects falls short of what the city needs to manage rising pension and other costs, Fitch Ratings said in cutting the city’s general obligation bond rating by two notches.

Fitch dropped the rating Tuesday to BBB-plus from A and warned of the potential for further deterioration by continuing its negative outlook. The review comes ahead of a $90 million GO note and bond issue selling competitively next week.  

The downgrade stems from “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,” Fitch said.

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.”

Milwaukee Comptroller Aycha Sawa questioned the timing.

“While we acknowledge the challenges the city is facing, we believe that significant progress has been made at the state legislative level to allow the city to raise additional revenue in order to fund pension contributions and public safety costs,”  Sawa said in a statement. “Furthermore, preliminary 2022 results are more favorable than expected. Given the positive momentum for the future of the City’s finances, the multiple notch downgrade came as a shock.”

The city’s drawdown of some reserves, rising costs, and rising pension payments have triggered a series of downgrades. 

Fitch in November dropped the rating two notches to A from AA-minus and put a negative outlook on the rating. S&P Global Ratings cut it by one notch to A-minus from A and assigned a negative outlook also in November.

The city’s 2023 budget covers a jump to more than $130 million in pension contributions that’s nearly doubled the prior five-year payment of about $70 million annually. The city sets the pension funding rate every five years.

Milwaukee has long clamored for more state help on the revenue front as state revenue sharing levels have long been stagnant and local governments are limited in their ability to raise most revenues by state law.

Help is at hand with Gov. Tony Evers, a Democrat, proposing several options earlier this year. While the legislature’s majority Republicans reconfigured the proposals, there’s wide spread support for measures that would provide Milwaukee and other local governments with more shared revenue aid.

Proposals also would give the city the ability to levy a sales tax for pensions if local voters approve. Some Democrats oppose the GOP version because of new governance restrictions built into the package.

“Regardless of whether the Wisconsin legislature passes, and the governor signs, Assembly Bill 245, which provides enhanced local government revenue sharing but comes at both a fiscal and self-governing cost for Milwaukee, the city will need to make cuts starting in 2024,” Fitch warned.

If the legislation is not successful, starting in 2025, the city will be forced to make deep cuts to core public safety services, given that without state action the city will have no additional revenue levers and would need make deep cuts and draw on reserves.

About 40% of city operating revenues come from state aid followed by property taxes at 32%.

Healthy reserves provided some cushion to the city but are largely attributable to non-recurring measures including note proceeds and stimulus that could quickly deteriorate absent significant structural budgetary changes, Fitch said.

The city is still waiting on S&P’s review ahead of the bond sale, said Joshua Benson, capital finance manager.

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