Milwaukee heads into the market with breathing room from ARPA

Milwaukee heads into the market Thursday with its ratings intact after federal coronavirus relief provided some fiscal breathing room for the city as it lobbies state lawmakers for a local sales tax that would provide a long-term fix to tackle ballooning pension payments.

The city will take competitive bids Thursday on $111 million of general obligation notes and bonds. PFM Financial Advisors LLC is advising the city. Katten Muchin Rosenman LLP and Hurtado Zimmerman SC are co-bond counsel.

Proceeds will fund street improvements, development projects, working capital, police, fire, sanitation, library, port, and other various capital projects and refund some debt.

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Fitch Ratings and S&P Global Ratings affirmed their respective AA-minus and A ratings, noting that American Relief Plan Act relief has eased operating pressures and improved some financial metrics.

A $50 million spike in pension contributions next year still looms large for both ratings, which carry negative outlooks.  

“The influx of federal dollars has given us some financial flexibility going forward but we are also reducing the budgeted draw down on reserves and building our pension stabilization fund,” said Joshua Benson, deputy city comptroller. “I think that makes us financially stronger going forward while we work on addressing the pension situation.”

The city suffered several downgrades driven in part by annual balance draws. The city reduced the draw to $10 million in 2020 from $16 million in 2019 and cut it to $6.5 million last year. The current budget relies on a $4 million draw. Nearly $400 million of ARPA relief has helped manage expenses and freed up tax levy dollars.

“Our office has been working with the administration to try to limit the fund draws and would like to take them down to zero for budgetary purposes,” Benson said. “It will ease pressures on the ratings and we believe it’s more fiscally prudent.”

Comptroller Aycha Sawa’s office manages debt issuance but works with the administration on budgetary matters.

Mayor Cavalier Johnson, then Common Council president, took office as acting mayor last year after Tom Barrett resigned to become the U.S. ambassador to Luxembourg. Johnson, the city’s first Black mayor, won a special election earlier this month to serve for the remaining two years of the term.

Pensions loom large over city finances as payments will swell by $50 million next year when a new actuarially determined employer contribution will be set for the following five years. The amount is currently expected to rise to $135 million from $72 million, a big jump but not as burdensome as a prior estimate of $70 million.

A mayoral task force on pensions last year warned a 24% cut in the workforce could be needed to manage the payments in the absence of new revenue. City property taxes fall under state caps, the state’s sales and income tax revenue sharing program has been stagnant, and other revenue raising options are limited.

“The backup plan is service cuts if there’s no extra revenue coming in because we are required by law to produce a balanced budget,” Benson said.

The city is working to build support for state legislative action on a local sales tax option that would benefit the city and county providing between $55 million and $60 million for the city. One proposal would direct some collections to property tax relief while police and fire unions are pushing to include language barring personnel cuts. Some are advocating for folding new employees into the state’s fully funded retirement system.

A bill did not surface in the now-ended 2022 session but the city is aiming for action next year. Pension obligation bonds could be on the table in a legislative package but Benson stressed that the comptroller’s office believes any borrowing must be tied to a broader reform package to warrant taking on the arbitrage risk.

“Failure to implement a new revenue stream at the next legislative session in January 2023 or sufficiently cut spending to close the budget gap could lead to a downgrade,” Fitch said.

In the interim, the city has built up to $81.5 million a special fund to help manage future payments. Using ARPA to cover lost revenues and cover some operating expenses freed up tax levy dollars for reserves without violating ARPA rules that bar deposits into reserves. That help is expected to continue in the 2023 budget.  

The pension system’s last actuarial review reported a $1.3 billion unfunded liability and funded ratio of 80.7%.

"The negative outlook reflects our view of the city's substantial anticipated increase in annual pension costs beginning in 2023 and the potential adverse effects of this increase on the city's budget without a long-term readjustment of revenues and expenditures to accommodate these higher pension costs," said S&P analyst David Smith.