Bonds

Fitch upgrades Milwaukee to A-plus from BBB-plus

Fitch Ratings last week upgraded Milwaukee’s issuer default rating and general obligation rating to A-plus from BBB-plus. The outlook is stable. 

Milwaukee benefited from Fitch’s new rating criteria, rolled out last month, which incorporate most of the credit factors that Fitch has considered historically but include additional analytical factors and now assign specific weightings to each factor.

And Fitch now provides issuers with a numeric value tied to their letter rating, so they can see how far they have to go to achieve an upgrade or how close they are to a downgrade.

Milwaukee enjoyed a three-notch Fitch Ratings upgrade, to A-plus from BBB-plus.

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Moody’s Ratings assigns Milwaukee a rating of A3, outlook stable, and S&P Global Ratings rates the city A-minus, outlook stable.

In its rating report, Fitch also noted that the Wisconsin Legislature’s passage of Assembly Bill 245, known as Act 12, “reversed a long-standing trend of flat or declining revenues… and staved off deep public safety service cuts that the city was being forced to contemplate in fiscal 2024.” The legislation was enacted last summer.

Act 12 raised the city’s state shared revenue by $22 million after years during which it held steady and failed to track inflation. And it allowed Milwaukee to enact a city sales tax of 2%, which is projected to bring in $180 million in annually recurring revenue.

“Prior to the implementation of Act 12, the city of Milwaukee was facing a projected budget shortfall of $150 million to $180 million, with drastic reductions to public safety being the most viable option for achieving a balanced budget,” Milwaukee Comptroller Bill Christianson told The Bond Buyer. “The financial provisions of Act 12 helped the City avoid that ‘fiscal cliff’ and put the city’s financial outlook on a much more solid foundation.”

The city was also facing a sudden surge in pension payments due as it reached the end of a five-year cost smoothing period – an “important piece of their credit story” and the cause of a two-notch downgrade by the rating agency last spring, said Ashlee Gabrysch, Fitch’s Midwest region manager for local government ratings. 

“They were able to keep pension payments pretty steady for five years, but then when they would do things like increase the investment return assumption, and/or when they just had poor investment return years, it would yield a huge jump in those pension payments — which is what we were seeing last year,” she said.

“Act 12 really was a financial game-changer for them in a couple ways,” Gabrysch added. “Increasing that state-shared revenue $20-ish million, and also then giving them the ability to levy that sales tax increase, which, they think that over time, when they hit full compliance, will get them about $180 million. Which really is earmarked for pensions, which was a constrained cost driver for them.” 

For key rating drivers, Fitch looks at the financial profile of an issuer; it looks at demographic and economic metrics; and it looks at the long-term liability burden, Gabrysch said. Within that demographic and economic section, they look specifically at population size and at something they call economic concentration.

Fitch noted approvingly Milwaukee’s inclusion in the Milwaukee-Waukesha metropolitan statistical area, whose GDP, total employment and other attributes, Gabrysch said, contributed to the committee’s decision “to apply that additional analytical factor on economic and institutional strength [to Milwaukee].”

But Fitch also pointed to the city’s “limited” budgetary flexibility. And it highlighted Milwaukee’s long-term liability burden, which it said is weighing down the city’s credit profile. In terms of long-term liabilities to personal income, Milwaukee is in the 11th percentile of Fitch-rated local government issuers. In terms of long-term liabilities to governmental revenues, it is in the 10th percentile. But in terms of carrying costs, the city is in the second percentile.

“The city of Milwaukee is limited in its ability to raise revenue when compared to other cities of its size nationally [due to] state-imposed property tax levy limits [that] typically limit growth in the city’s largest revenue source, the property tax levy, below rates of inflation,” Christianson said. “The city’s second largest revenue source is state shared revenue… Prior to Act 12, state shared revenue had been flat for nearly 20 years.” 

Milwaukee also depends on a revenue stream from the state that it would lose if it grew its expenditures too much and violated the Expenditure Restraint Program, Christianson said. 

He added that he expects debt issuance to remain “stable” over the short- to medium-term future – “very similar to the past several years on an annual basis.”

Fitch also affirmed Milwaukee’s Redevelopment Authority bond rating of AA and removed Milwaukee from its Under Criteria Observation designation.

“We published the new criteria for local governments… and then on April 4, we published the universe of Fitch-rated issuers and related securities that we thought might have their ratings move due to just the implementation of the new criteria,” Gabrysch said. “Milwaukee was part of that Under Criteria Observation list… When we took Milwaukee to committee, it was a good example of a local government where there was some benefit to the rating because of the implementation of new criteria. But there was also underlying credit improvement because of the passage of Act 12.”

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