CHICAGO – Milwaukee’s weakening fund balance prompted a warning from S&P Global Ratings that a downgrade could loom.

City Comptroller Martin Matson’s office is competitively selling on Jan. 24 $70 million of general obligation promissory notes maturing in 2023. Proceeds will go to prepay the city’s pension contributions from 2018 through 2022 to generate prepayment savings.

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S&P shifted its outlook on Milwaukee's AA rating to negative.

Ahead of the sale, S&P revised the outlook to negative from stable on Milwaukee's AA rating. Fitch assigned the notes its AA rating while affirming the city’s AA rating and keeping a stable outlook.

"The negative outlook reflects our view that there is a one-in-three chance of a lower rating within the next two years because of the city's declining available fund balance caused by general fund deficits," wrote analyst David Smith. “If this pattern continues in 2018, the city's budgetary flexibility could weaken to a level that we consider only adequate, which would likely lead to a lower rating.”

S&P acknowledged that significant expenditure reductions made in fiscal 2018 could ease those strains and stabilize the city's budgetary flexibility over the next two years. If that occurs, S&P said it would move the outlook back to stable. The city’s adopted 2017 budget relied on $27.6 million of reserves. The city’s 2018 budget relies on a $19 million draw despite a series of spending cuts and revenue-raising measures from user fees and its tax levy.

The city sought to offset concerns over the draws.

“The city has been, and continues to be, well within budget,” Matson’s office said in a statement. “Their concern was a budgeted drawdown of reserves that was not totally offset during the year via expenditure restraints or excess revenues. Over the past few years, the unbudgeted positive variances have raised reserves to 12% of general fund expenditures. Over time, the city targets the 5% range for reserve levels.”

The city can also tap for emergencies a special Public Debt Amortization Fund that is funded at 8% of general fund expenses.

Fitch said its rating reflects “the city's stable financial performance over time, exceptionally strong gap-closing capacity, and moderate long-term liabilities. A demonstrated capacity to cut spending, low expected revenue volatility and sufficient financial cushion offset Fitch's expectation for limited revenue growth.”

The city’s pension plan is well-funded at an actuarial level of 92%. Risks include limited tax raising flexibility due to state caps and a dependence on the state to live up to its shared revenue pledge as it accounts for 40% of general fund revenues. Property taxes account for 30%. In its favor, the city is less vulnerable to economic conditions that impact revenues like sales taxes.

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