ARPA Funds Can’t Plug City Budget Hole

It seemed like an unbelievable windfall when it was announced in 2021.

The City of Milwaukee was to receive $394.2 million from the $1.9 trillion American Rescue Plan Act. Ideas quickly came forward: upgrade all the failing street lights, fix up every vacant, city-owned home or do an unprecedented level of lead abatement.

Now it could end up being a big disappointment, with a newly formed committee possibly presiding over allocating all of the remaining money to plug budget holes and the city still having to cut services.

The council struck a deal on what to do with the first half of the money in 2021. Funds were allocated towards a number of projects including building a new Martin Luther King library branch, redeveloping Westlawn Gardens, training childcare providers, reckless driving interventions, seeding a modular housing factory, expanding the city’s violence interruption program and fixing up a number of failing street lights and vacant homes.

But the biggest portion of the money went to an accounting trick enabled by the revenue-loss provision of the federal bill. A total of $50.8 million of the Milwaukee Fire Department‘s 2022 budget was replaced with ARPA funds. That freed up $36 million in tax levy revenue to be spent free of ARPA restrictions, with $30 million going to a pension reserve fund. Congress otherwise prohibited ARPA funding from going directly to paying for pensions.

The city’s pension system is the City of Milwaukee’s biggest problem. Given state-imposed revenue restrictions and revenue-sharing cuts, Milwaukee needs to begin laying off one in four city workers next year unless something else changes.

The pension is required by law to be fully funded and a five-year smoothing formula resets next year. A reduction in estimated investment returns and growing public safety pension costs has the city needing to come up with an additional $50 million annually, on top of the approximately $70 million it is already contributing annually.

Inflation and other factors are also driving up costs. As recently as April, the budget office was predicting a $95 million structural deficit next year. It was to be largely offset over the next two years by certifying $160 million of the $197.1 million in remaining ARPA as lost revenue funding and plugging the city’s budget holes.

But since April the deficit has grown and the amount of money available has shrunk.

Following the submission of department budget requests, budget director Nik Kovac told the Finance & Personnel Committee Wednesday that the budget deficit is now $150 million.

“The good news is we looked at the requested budgets and we can probably trim off $15 to $20 million without big effect,” said the new budget director. The bad news is that leaves a gap of $40 million for 2023, and it would repeat next year.

The council also altered the mayor’s request to earmark the $160 million as lost revenue. It cut the two-year request to one, then cut $5 million. Only $75 million is currently set aside and an additional $10 million was allocated to replace failing street lights.

Alderman Michael Murphy asked Kovac how much of the remaining $112.1 million the city needs just to plug budget holes.

“The direct answer to that question would be all of it and then some,” said Kovac.

So What’s Next?

After an acrimonious adoption process in 2021 for the first half of the ARPA funding, the council is backing the creation of a new entity to decide how to spend the remaining funding.

On Wednesday, the Finance & Personnel Committee backed the creation of the ARPA Funding Allocation Task Force. All future funding allocations would run through the committee.

The committee would include Mayor Cavalier Johnson, Council President Jose G. Perez, Finance committee chair Marina Dimitrijevic, two council members who represent impoverished census tracts, Comptroller Aycha Sawa, Kovac, Chief Equity Officer Nikki Purvis, community development grants administration director Steve Mahan and two community members (one appointed by Johnson, the other by Perez).

Alderman Ashanti Hamilton, the leading critic of the first spending plan, is backing the task force and said it is important, even if the remaining money goes to cover only sustaining services.

“We should be doing it comprehensively and we should be doing it transparently,” he told the committee. “Many of the people living in the city will not know what those impacts are if we don’t have a community process explaining that.”

“We end up in a better place than if we had not engaged and not included the community in the conversation,” said Alderwoman Milele A. Coggs.

“I see this as a great opportunity,” said Dimitrijevic.

The proposal is sponsored by Hamilton, Perez, Dimitrijevic, Mark Borkowski, JoCasta Zamarripa and Coggs.

But not every council member is giving it glowing praise. Murphy said he wanted to be transparent from the get-go that his focus would be on maintaining essential services.

Ald. Scott Spiker questioned if the task force would be “theater” knowing that all of the money could end up going to revenue replacement.

Johnson’s council liaison Arlisia McHenry said the mayor’s office was sticking with its original plan that approximately $25 million would be available for community debate. “That was the original plan and we are sticking with the plan,” she said.

Kovac said it would be important to explain the equity impacts of both cutting certain services and using the ARPA money on other projects.

Coggs pushed for the city to continue to examine how it delivers its services. She and others indicated that even though money went to maintaining services, it didn’t mean services couldn’t be improved.

“The truth is ARPA dollars alone aren’t going to save us from our fiscal issues. Just like shared revenue alone isn’t going to save us from our fiscal issues,” said the alderwoman.

The task force is to complete its work by January 2023. The full council will review its creation on June 21.

Long-Term Solutions

There are ways out of the city’s fiscal straitjacket, but they might not be quick or easy.

While on the campaign trail, Johnson pledged to get a cot in the Wisconsin State Capitol if necessary to convince legislators to either allow new local revenue sources, restore shared revenue cuts or merge the city’s pension system with the state system. He reiterated the need during his inaugural address in April.

State shared revenue, designed as a rebate of income taxes, has been stagnant for two decades. Adjusted for inflation, it means the city is receiving $115 million less annually than it did in 2003.

The city is prohibited from levying its own sales tax, or virtually any other special tax. Cumulative property tax collections are effectively capped by state law. One thing that isn’t capped is fees, though they must be structured only to cover the cost of the related service. That has led to a proliferation of such fees in recent years, including the controversial street lighting fee.

A task force concluded its work in 2021 on the city’s pension woes, producing a list of 12 options that ranged from specialized borrowing to cutting benefits for new employees. “I don’t want to overstate this, but it’s a doomsday list,” said Kovac, then an alderman, while calling for the state to be a partner in a solution.

The pension reserve fund is stocked with approximately $82 million as a result of years of anticipating the funding crush. But how much would be used in the upcoming budget is subject to the mayor’s budget proposal, expected to be delivered in September.

In the meantime, Johnson, Kovac and others will continue to watch the stock market slide and hope it doesn’t expand the amount of funding needed to make the pension whole.