Milwaukee suffered its second rating hit of the year as the city gets pushback from rating agencies for its use of fund balances to manage budget deficits.
Moody’s Investors Service lowered the city’s general obligation rating by one notch to A2 from A1 and said the outlook remains negative. The action impacts $929 million of debt. Moody’s lowered sewerage system revenue bonds by one level to A1 from Aa3. The outlook also remains negative. The action impacts $60 million of rated bonds.
Moody’s attributed the GO downgrade to a narrowing of the city’s operating fund balance and the challenges posed by its limited revenue raising powers that are stymied by state tax caps. State aid to local governments has remained stagnant for nearly two decades and the legislature last year failed to pave the way for a vote on a sales tax hike. The city has not asked Moody's to rate new deals since 2016.
“The city's plans to place a sales tax initiative on the ballot, which requires state approval before proceeding, were delayed this year due to the coronavirus,” Moody’s said. “Without this initiative, higher state aid, or substantial expenditure cuts, the city's currently adequate reserves will deteriorate.”
The COVID-19 pandemic has added to the strains, but it's not a driver of the downgrade, as the city has so far weathered costs with its $103 million share of direct federal CARES Act relief covering pandemic-related expenses and $40 million in grants. While taking some revenue hits to fees and fine collections, its major sources of revenue, which comes from property taxes and state aid, are projected to remain stable.
Comptroller Aycha Sawa, whose office manages city debt programs, pushed back against the downgrade. “We are disappointed with Moody's recent rating action on the city,” she said. “Over the years, we have discussed with Moody’s the cyclical nature of the city’s fund balances.”
Sawa argued that because major revenue sources remain stable the city is in a better position to weather pandemic strains than others and the majority of 2020 revenue hits were due to the city’s suspension of parking enforcement and collection of various fees. The city has now resumed those collections.
“A downgrade and maintaining the negative outlook, in our opinion, does not accurately portray the city's ability and willingness to repay its existing and future debt obligations,” Sawa said.
The city is strained by an elevated pension burden and scheduled payment increases, Moody’s said. The city’s $71 million payment in the current budget is expected to rise to about $10 million in 2023 with payments of around $180 million annually through 2027. The city’s budget earmarks $8 million for a pension reserve fund, currently with a $34 million balance, to help the looming hike.
The sewer bond downgrade is linked to the city’s downgrade “given the strong governance connection between the city and sewer system as a component unit of the city including a history of comingling cash,” Moody’s said.
Moody’s previously had dropped the city’s rating in 2018 to A1 from Aa3
In September, S&P Global Ratings cut city’s general obligation rating by two notches to A from AA-minus and the sewer bonds to A-minus from A-plus. The outlook on the GOs s negative and the sewer bond is on CreditWatch with developing implications. S&P previously had lowered the GO to AA-minus from AA in April 2019.
“The downgrades reflect our view of the continued erosion of the city's available reserves, which have declined substantially in recent years because of weakened operational performance. The negative outlook reflects our view of at least a one-in-three chance of a lower rating during the outlook period based on continued fiscal pressures driven by the COVID-19 pandemic and recession and an ongoing stagnant revenue environment,” S&P said in September.
Fitch affirmed the city at AA-minus with a negative outlook in October ahead of a bond sale. It had moved the outlook to negative from stable in March and last year cut the rating by one level to AA-minus from AA.
