Milwaukee’s bond rating has been downgraded by a credit firm. Here’s what that means for the city.

A national credit firm downgraded Milwaukee’s bond rating last week, marking another indicator of the looming fiscal cliff the city is facing.

Fitch Ratings downgraded the city’s credit rating from A to BBB+, a two-notch downgrade. The change comes as Milwaukee faces what local leaders have called a “crisis” regarding its budget.

“Fitch’s downgrade … reflects the city’s large and growing structural budgetary imbalance driven by statutory revenue-raising constraints, escalating municipal cost pressures, especially for pensions, and reliance on state shared revenue that has not kept pace with inflation,” a report from the firm said.

The report also cast doubt on the impact of a proposed state shared revenue deal for Milwaukee. The report said money the state’s largest city would receive from that deal “may not be sufficient to minimize the budgetary imbalances in the near-term.”

“Fitch expects the city’s two largest sources of revenue, state aid and property taxes, to remain stagnant or grow below the level of inflation,” the report added. “The city’s independent legal ability to raise tax revenues is highly constrained by state law.”

City of Milwaukee Comptroller Aycha Sawa said she was surprised by the downgrade — which came out May 30.

“We don’t think anything that has happened in the last couple of months really would affect this city’s ability and willingness to repay our debts,” Sawa said.

Rob Henken, the president of Wisconsin Policy Forum, said with a lower bond rating, Milwaukee could have to pay higher interest costs on debts the city issues for capital projects and cash flow needs.

“Typically, a government is not going to see a downgrade of two levels, as Fitch has done for the city, unless the ratings agency has detected some very severe financial challenges,” Henken said.

A 2022 Wisconsin Policy Forum report pointed to an upcoming “day of reckoning” for Milwaukee’s finances as the combination of declining state aid, rising pension obligations and local revenue limits force city leaders to make tough budget decisions. The city has already had to make cuts to police staffing and eliminated fire stations in recent years.

“This is one more instance of an outside, independent entity, much like the Wisconsin Policy Forum, taking a careful look at city finances and ringing a very serious alarm bell,” Henken said.

S&P Global, another national ratings agency the city uses, didn’t change its credit rating for Milwaukee. Even so, Joshua Benson, Milwaukee’s capital finance manager, said both firms gave the city a “negative outlook,” which means the city’s credit rating could be further downgraded in the near future.

“We acknowledge the challenges that the city is facing, but we believe that significant progress has been made at the state legislative level, which would allow the city to raise additional revenue in order to fund pension obligations and public safety costs,” Benson said.

State lawmakers are still debating specifics within the shared revenue proposal, which would give communities across the state a boost in funding. Republican lawmakers who control both chambers of the state Legislature have drafted two separate proposals. One, which passed in the Assembly in May, would allow Milwaukee to raise its sales tax by 2 percent. But that would need to be passed by voters through a referendum.

The other, which is pending in the state Senate, would offer the same tax raise but lawmakers have said they’re open to allowing those to pass via votes from the governing bodies of the city of Milwaukee and Milwaukee County. The chambers would need to reconcile the final versions of each bill, and the question of whether or not to require a referendum has caused friction between leadership and cast the future of any final deal into doubt.

Milwaukee would be forced to make drastic budget cuts in coming years without state help. The city has already made several budget cuts in recent years, even as officials are using millions in American Rescue Plan Act funds to delay some cuts.

“If the legislation is not successful, starting in 2025, the city will be forced to make deep cuts to core public safety service delivery, given that without state action the city will have no additional revenue levers and would need to both deeply cut services and meaningfully draw down reserves,” the report said.

A 10 percent cut to the Milwaukee Fire Department could lead to the closure of seven fire stations. Meanwhile, a 25 percent to the Milwaukee Police Department could lead to the loss of 602 police positions.

According to the Wisconsin Policy Forum, Milwaukee is unique among dozens of peer cities because it does not have a sales tax as a source of revenue, or other forms of tax revenue beyond its property tax. Henken said he believes state taxpayers should also be aware of the issue Milwaukee is facing, which he called the “economic engine” of the state.

“The city’s problems are so deep and so structural, it does not have the ability to solve those problems on its own,” Henken said. “There’s going to have to be some help from the state of Wisconsin.”