CHICAGO – Milwaukee’s comptroller slammed Moody’s Investors Service for a downgrade that cited the city’s pension funding status and other factors he insists haven’t materially deteriorated since the rating agency’s last review.
Moody’s late Monday lowered the city’s general obligation unlimited tax rating on $932 million of debt by one notch to A1 from Aa3. The outlook is stable. The new level is two notches below where Fitch Ratings and S&P Global Ratings rate the city.
“The A1 GO rating reflects the city's escalating pension obligations that are somewhat masked by aggressive actuarial assumptions,” Moody’s wrote. “Other credit challenges include weak resident income indices, recent declines in operating reserves and an elevated debt burden.” The credit profile benefits from a large tax base and long-standing role as an economic engine in the state.
“It’s just disappointing…nothing has changed” materially in the pension status or on several other fronts since Moody’s last report in 2016 and its downgrade to the Aa3 level in 2014, the city’s elected comptroller, Martin Matson, argued in a phone interview. Matson’s office manages city borrowing.
“They didn’t listen to a thing we said,” Matson said of a recent surveillance meeting with analysts. “Moody’s is in an ivory tower and has no clue about what the reality is,” Matson added, suggesting that its methodology could be flawed.
The comptroller’s office said it did not see its borrowing cost rise after the last Moody’s downgrade so it’s hoping the new one doesn’t have an impact.
One factor the city acknowledged did deteriorate is its reserves which have been drawn by about $20 million annually in recent years but officials insist reserves remain at planned levels.
Milwaukee has not asked Moody’s for ratings on its GOs since 2016.
“Moody’s is the more expensive of the three” and “we didn’t want to pay for their services because the other two agree on what our rating should be,” Matson said.
Fitch and S&P both rate Milwaukee AA. Ahead of a city sale earlier this year, S&P shifted its outlook to negative, citing the city’s weakening fund balance due to the draw downs. Fitch affirmed its rating and stable outlook.
“We stand by what we said in the report,” said Moody’s spokesman David Jacobson.
The city argues that Moody’s “factors that could lead to a downgrade” in 2016 cited further declines in the tax base valuation, resident incomes levels, or resident employment rates; a reduction in reserves; and failure to adhere to internal debt management policies and procedures. Moody’s reference to city pension obligations in the report cited an adequately funded pension plan.
“With the 2017 stock market returns, and the city’s $60 million annual supplemental contributions to the pension system, the pension situation has improved since 2016, not worsened,” the city’s statement said.
In response to Moody’s commentary on the city’s “aggressive actuarial assumptions,” the city said it has lowered its discount rate to 8% for five years when it would then rise to 8.25%.
While systems across the country have been lowering their rates in the direction of 7%, Milwaukee believes its current investment expectations are reasonable and calls Moody’s 4% rate used in its liability calculation “ultra conservative.” Based on an 8.25% rate, the city’s pension fund was over 90% funded last year.
Unemployment is down and resident indices have held steady. The reduction in reserves is the sole factor the city acknowledged deteriorated but reserves remain at targeted levels.
Moody’s cites as positive 4% growth in the tax base and moderation in the city’s use of complex debt instruments while its credit challenges include weak resident indices, high unemployment, operating reserve declines, an elevated debt burden, and growing pension obligations.
It believes reserve draws have pressured the city's credit profile, but the general fund balance is expected to stabilize after an anticipated $19 million draw this year. “Despite planned draws, management aims to hold at least 5% of general fund expenditures in the tax stabilization reserve, a threshold the city currently exceeds,” Moody’s wrote.
“The city's pension obligations are high and are growing,” Moody's wrote. “The city’s single year 2016 adjusted net pension liability” based on calculations Moody’s applies “currently stands at a significant $2.5 billion, which has doubled from fiscal 2011 ANPL of $1.2 billion.”
“Milwaukee's continued use of an unsustainable discount rate, currently set at 8.5%, masks the city’s true net pension liability,” Moody’s wrote.
“The city’s discount rate stands at a stark contrast to other national pension plans” including the Wisconsin Retirement System whose discount rate is at 7.2%. It calls the city’s reduction to 8% favorable. The city’s other post-employment benefits unfunded liability of $1 billion is “very sizable,” Moody’s added.