ARPA Funding May Delay City’s Fiscal Cliff Says Policy Forum

A new Wisconsin Policy Forum report on the City of Milwaukee’s proposed 2022 budget confirms what city officials have been saying. This is the calm before the storm.

The non-partisan organization’s report urges caution on the city’s proposed use of federal pandemic funding that could mask structural issues that afflict the revenue-restricted city.

“For the past several years, our budget briefs have described the factors behind the city’s worsening financial outlook, a finding corroborated by national ratings agencies through recent credit rating downgrades,” wrote report authors Ashley Fisher, Ari Brown and WPF president Rob Henken. “The 2022 proposed budget shows further erosion as diminishing reserves limit capacity for withdrawals and locally-generated revenues and state aids remain stagnant. These dwindling resources leave the city with little recourse to meet inflationary cost growth and a massive increase in the employer pension payment that will be required beginning in 2023.”

The unprecedented allocation of $394.2 million from the American Rescue Plan Act is intended to address the city’s pandemic-induced fiscal issues, but federal rules prohibit the funding from being used directly used to address the city’s biggest issue: a looming need to come up with at least $70 million annually starting in 2023 to fully fund its pension system.

“As we will show, the nearly $140 million from ARPA that is proposed to plug operating holes over the next three years will alleviate the need for potentially severe service cuts but may ultimately intensify the city’s structural challenges,” says the 21-page report. WPF ultimately gives four keys to understanding the budget.

The report notes that Mayor Tom Barrett‘s executive budget proposal uses $34.6 million of ARPA funding to expand the city’s general fund by 4.6%. The council is poised to expand the amount through its proposed ARPA spending plan.

Some of the $34.6 million would go towards addressing the pandemic through the Milwaukee Health Department and Department of Administration, while much of it would pay for salaries and benefits. The move is intended to delay the potential need for eliminating positions through attrition or layoffs while the city seeks new revenue sources or other liability reductions. But will it work? A council committee met with other city officials in closed session Monday to address a pension task force report.

The WPF report lays out four key items necessary to understand the city’s proposed budget and fiscal issues.

The first key is that the city’s structural imbalance is growing. Milwaukee is reliant on state aid, can’t substantially increase local revenue under state law and state aid is stagnant or falling. The tax stabilization fund has been increasingly tapped as a result, falling from a high of $61.7 million in 2016 to $13.8 million in 2020. The report notes that a political decision is being made to hold fees steady and limit the size of any property tax increase, which will exacerbate the imbalance in future years.

The second key is that the ARPA funds will delay the city’s 2023 fiscal cliff. “Because the ARPA allocation would fill holes that are structural in nature – as opposed to replacing revenues that have taken a temporary hit but might ultimately rebound once the pandemic subsides – those holes are likely to re-emerge once the ARPA funds are exhausted,” says the report of Barrett’s proposal. “Generally, a cardinal rule of government finance is that one-time sources of funding (like the ARPA monies) be spent on one-time costs to avoid difficult program cuts or undue pressure on taxpayers when the funds run out. In choosing to disregard that maxim, the city is setting itself up for some excruciating decisions in 2025 in critical areas like fire and police.”

The council proposal reallocates $30 million of ARPA money to pension reserve fund, using an accounting trick and the funding’s lost revenue provision. The report, written before the council proposal, acknowledges Barrett’s strategy is predicated on generating state support for new revenue sources like a sales tax. Without action, the city is expected to need to lay off 25% of its workforce by 2025.

The third key is the driver of that potential 25% workforce reduction: the looming pension crisis.

“The huge increase in employer pension payments stems largely from a decision by the city’s pension board to lower the assumed rate of return of pension fund investments from 8.24% to 7.5% to more closely align with historical trends and projections for the future. That decision – as well as other actuarial changes – impacts the city’s contribution in 2023 because of its “stable contribution policy.” The policy dictates that the city will re-set the contribution every five years based on actual investment returns and various updated assumptions. The last re-set occurred in 2018,” says the report.

Barrett and council officials have warned of this looming problem for years, but have had little power to meaningfully address it without state support. The pension reserve fund will be expanded to approximately $80 million under the council’s ARPA proposal.

“The ability to use ARPA dollars to fill operating gaps may delay the day of reckoning for a few years, but that day still is approaching,” writes the WPF.

The fourth key is the increasing investment in the health department. Much of the ARPA funding, under both Barrett and council proposals, would go towards addressing the city’s lead poisoning issues and the struggling department program. But $8.3 million in 2022 would go towards MHD’s pandemic response.

The report finds that using ARPA funding to back existing positions is a double-edged sword. “The fiscal cliff may grow higher once the ARPA funds are exhausted even as its timing is pushed back,” write the authors.

“Nevertheless, both policymakers and citizens should be aware that the magnitude of the city’s long-term structural problems has not diminished, and that the relief provided by ARPA is only temporary and carries risk. In fact, that risk is not only fiscal in nature but is also psychological in terms of the false comfort it may provide to citizens and the false message it may send to Madison that the city’s financial challenges may not be so bad after all,” says the report.

The Common Council’s Finance & Personnel Committee will consider amendments to the budget on Oct. 28 and 29 before adopting the full budget on Nov. 5. Barrett may then issue vetoes, but the council has overridden the mayor’s recent budget vetoes.

A full copy of the budget brief is available on Urban Milwaukee.