Ratings agency downgraded Milwaukee's credit. What does that mean for property taxpayers?
A credit rating firm has downgraded Milwaukee's credit rating citing the city's impending fiscal cliff as state-imposed limits on revenue mean they can't keep up with rising costs.
The decreased score from Fitch Ratings means that it'll cost more for the city to borrow, although it's unclear just how much interest rates will increase, said Rob Henken, president of the nonpartisan Wisconsin Policy Forum.
Whether this has a long-term fiscal impact really depends on the legislation passed by the state Assembly, now before the Senate, that would allow the city to levy a 2% sales tax if approved by voters, said Henken.
However, increasing rates could impact city taxpayers in the future. Here's what you need to know:
What does it mean to have a bond rating decreased?
"The rating action reflects the view of this one rating agency regarding the city's ultimate creditworthiness and their ability to repay their debts going forward in the future," said Joshua Benson, the city's capital finance manager.
He added that BBB+ is still an investment-grade rating but is just two notches above the lowest investment-grade rating.
What's the effect of having a rating decreased?
Benson compared the rating to a personal credit score.
If a personal borrower’s credit rating drops, the interest rate that person would pay on a new car loan or a new mortgage would be higher. In general terms, the same dynamic is at play with municipal debt, he said.
Henken said borrowing, or issuing bonds, makes sense for capital projects that will have a useful life of many years.
“It’s like financing your home,” he explained.
The problem, he said, isn’t that the city needs to borrow but that it will likely pay higher interest on the tens of millions of dollars it borrows annually to maintain a healthy capital program.
How does the rate impact taxpayers?
It's too soon to tell how the rate will continue to impact taxpayers, said Henken, but city policymakers could levy more in property taxes to pay for increased debt.
"The higher payments will have an impact. The question is whether the impact will be on property taxpayers or services. Or both," Henken said.
The payments on the debt that is about to be issued would not be felt until next year's budget.
How does this impact current loans the city already has?
The downgraded credit rating could impact the city's current loans if the city would refinance those debts, said Henken.
Does this mean the city will take out less debt in the future?
Maybe, said Henken.
If interest payments are higher, there may come a time when the city determines it can't afford to issue as much debt. That will be dependent upon whether the credit ratings remain elevated for a prolonged period of time.
Contact Alex Groth at agroth@gannett.com. Follow her on Twitter at @grothalexandria.
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This article originally appeared on Milwaukee Journal Sentinel: Will Milwaukee's downgraded credit rating from Fitch affect taxpayers?
