City Budget A Train Wreck
By Alderman Bob Donovan
The City’s Budget Office currently projects that City expenditures will exceed revenues by $90 million in 2010. This gap will grow to $129 million in 2011 and $169 million in 2012. Since personnel costs (salaries and fringe benefits) account for 84% of City expenditures, it is not surprising that Mayor Tom Barrett recently announced that the City will need to cut 1,000 to 1,400 jobs over the next 2 to 4 years. The City will soon be faced with choosing between the drastic service reductions that would accompany these job cuts or a substantial increase in the property tax rate, or some combination of the two. But how did the City’s finances reach this point? Here are the major factors contributing to Milwaukee’s looming fiscal crisis:
1. Falling value of the City’s pension fund
The majority of the City’s pension fund assets are stock market investments. The recent decline in the stock market has had a devastating impact on the value of these investments: the total value of the pension fund fell by 33% in 2008, from $5.1 billion to $3.4 billion. The City Charter requires that the pension fund’s assets-to-liabilities ratio be maintained at or above 100%. At the beginning of 2008, this ratio was 131%. Because of the stock market crisis, the fund now has only 90% of the assets needed to meet its long-term obligations. This means that the City will have to contribute more to the pension fund in 2010 and beyond to make it “whole.” The Budget Office estimates that the City will have to contribute at least $40 million more to the pension fund in 2010 than in 2009 (total 2009 budgeted contributions are $35.9 million). Since the City’s ability to increase the property tax levy is limited to 3% per year, the City will have to reduce tax levy support for its other services to compensate for increased pension fund costs.
2. Decline in total assessed value of Milwaukee real estate
Because of the interrelated problems of falling home sale prices, a deep economic recession and the proliferation of mortgage foreclosures, the assessed values of Milwaukee properties are declining. At the end of February, there were 6,532 properties, with an aggregate value of $737 million, that were either open foreclosure filings, bank-owned properties or City-owned in rem properties. The presence of so many foreclosed properties is depressing local real estate values. The Assessment Commissioner estimates that the total assessed value of Milwaukee real estate declined by $1.5 billion (5%) from 2008 to 2009. This means that, unless City leaders increase the property tax rate, total tax revenues available to fund the 2010 budget will drop substantially (nearly $12 million, assuming a stable tax rate). Alternatively, if the 2010 budget levies 3% more than 2009 (the maximum increase allowed by the State of Wisconsin), the tax rate would need to be raised to $8.77 per $1,000 valuation, or 8.4% more than the current rate of $8.09.
3. Flat or declining state shared revenue
Unlike many other large cities, Milwaukee is highly dependent on state shared revenue to fund its operations. In the 2009 budget, 38% of the funding to support general City purposes comes from this revenue source. However, state shared revenue payments have been frozen since 2003, meaning that the “purchasing power” of the annual payment has decreased significantly. Adjusted for inflation, Milwaukee has experienced a decline in state shared revenue of over $61 million between 2003 and 2009. For 2010, the City’s state shared revenue payment is projected to drop nearly $500,000 in real dollars.
4. Rising fringe benefit costs
Since 2005, the City’s expenditures on employee health care benefits have increased an average of 4.7% annually. While these increases exceeded inflation and the pace of City revenue growth, they were manageable. Unfortunately, these modest increases may soon be a thing of the past. The Budget Office projects that employee health care costs will jump $16 million in both 2010 and 2011 and $17.5 million in 2012, for an average annual increase
of 12.7%. In real-dollar terms, these increases will actually exceed the anticipated increases in total salary payments over the next three years.
5. State mandates
To a considerable extent, Milwaukee’s ability to increase revenues and control costs is limited by state law. The Wisconsin legislature has determined that local government finance is a matter of “statewide concern.” Therefore, Wisconsin municipalities cannot collect revenue of a particular type without specific state enabling legislation. As a result, Milwaukee is more dependent on the property tax than most other cities around the country, which can increase their revenues by collecting various local-option taxes not available to Wisconsin municipalities (e.g., sales tax, income tax and gasoline tax). Other state mandates that significantly impact the City’s costs and revenues are the previously-mentioned tax levy limits, the highly-prescriptive statutes on collective bargaining for municipal labor contracts, and the mandates banning various recyclable materials from landfills, which, when coupled with falling state grant support for recycling activities, mean that the City has to cover an ever-increasing portion of the costs of its recycling program.
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