12 Options to Solve Milwaukee’s Fiscal Crisis

The City of Milwaukee faces a fiscal crisis.

Starting in 2023, the city will need to come up with an additional $74 million annually to put its pension system back on a pathway to being fully funded. That would more than double the cash-strapped city’s annual pension contribution and, with no other changes, result in a need to lay off 24% of general city workers by 2026.

The crunch is being driven by a variety of factors, including a decline in estimated returns (from 8.24% to 7.5%), an update to a five-year smoothing formula, a decades-old settlement affecting city employees who started before the year 2000 and the growing cost of public safety employees.

Mayor Tom Barrett commissioned a 16-member task force to study the issue earlier this year. The group, chaired by Safe & Sound executive director Joe’Mar Hooper, met five times between June and September and produced 12 options to address the crisis.

“One noticed early on that there was no panacea for us getting out of this,” said Hooper on Wednesday when the report was presented to the Finance & Personnel Committee. “We really need to rely on the state to be a partner with us to be part of these conversations to get significant relief.”

But committee chair Alderman Michael Murphy isn’t pleased the report is coming so late, and with options instead of previously promised recommendations.

“The timeline played a big part in that,” said Hooper. “We didn’t really have much of a chance based on the tight timeline we were on to dive into these issues”

Barrett’s policy director Aaron Szopinski echoed those remarks. “For the timeline we were in, we knew it was all a sprint, not a marathon,” he said.

“I wrote a letter nearly two years ago to the mayor and the budget director asking what your next steps are,” said Murphy. “We have all known at least the last four years what was coming for us.”

The council was represented by Ald. Nik Kovac on the task force.

“Even if we had [spent more time], I don’t know that this report would be substantially different,” said Kovac. “One thing that’s great about this task force is it had a diverse group of stakeholders that don’t agree on much big picture.” Participants included retired and active employees, union representatives, retirement system representatives and community members.

“The only good option is for the state to be a partner,” said Kovac, noting that the state has money and controls the city’s authority to raise its own. “All the other options are bad.”

“I don’t want to overstate this, but it’s a doomsday list,” said the alderman.

What are the options?

1. Close the City Pension Plan to new entrants, and have new entrants instead join the State’s retirement system.

“The actuary has indicated we would need to take care of our $1.1 billion in unfunded liability and amortize that over 10 years,” said budget director Dennis Yaccarino of the fiscal challenge. The biggest change of moving to the state system is no cost-of-living adjustment is included. “If the fund is doing good you get some dividend payments I think they call it.”

Sworn personnel (police officers and firefighters) would also see only a 85% payment, instead of 90%. But overtime becomes a factor, because the state considers the last three years of salary while the city’s considers only the last year of salary.

The city would need to contribute more per active employee based on the state’s estimated annual return, which is lower than the city’s return. “It’s not a simple analysis,” said the budget director. “Overall our costs will go lower with new employees if we go with the state.”

2. Create through ordinance and collective bargaining negotiations (as required) a new benefit design/structure for new entrants within the CMERS plan

“We are seeking changes in negotiations and that’s all I can say about it in public,” said Yaccarino. The city’s sworn public safety employees are protected by collective bargaining (and exempt from Act 10), which makes it difficult to impose any changes on them. That includes everything from a vaccine mandate to a pension change.

“Current law requires bargaining for a lot of these issues,” said Szopinski.

3. Estimate and specify the needed reduction in City services and staffing to ensure all required future funding contributions are made as currently projected.

An earlier report from Yaccarino’s office estimated that without a new revenue source or change in staff, one-sixth of the entire authorized city workforce would need to be eliminated by 2026. That rises to 24% when considering only the filled positions.

The report calls for 562 layoffs in 2023 and 506 in 2024. An additional 300 layoffs would need to take place from 2025 through 2027. The layoffs would reduce the authorized workforce by more than 18% —  and this comes after the city has cut 650 jobs since 2004 and has saved more than $50 million in a pension reserve fund.

“The average salary of a city employee is like $45,000, so if you have to cut $80 million you can see that’s a lot of services you’re going to have to cut,” said Yaccarino in April when he presented the report. That salary figure is much higher for public safety employees.

4. Change the City’s legal requirements and funding policy and explore other metrics for funding that avoid the need for draconian budget cuts, while securely funding current and future retirement benefits.

Szopinski referred to this option as a pair to item three. It could include a change to the city charter that requires the pension to be fully funded. The city pension is funded at 88%, while a Pew Charitable Trusts report shows that nationwide that figure is only 84%.

“It makes me nervous because I don’t want to underfund our pension,” said Ald. Scott Spiker.

“I fully understand what you’re talking about, but that’s the tradeoff,” said Yaccarino of the risk of the market tanking.

“Everyone knows there is nothing but bad choices,” said Spiker.

5. Consider selling or leasing City assets and allocating revenues in a planned manner to minimize cutting critical City services currently funded by the property tax as employer pension contributions increase.

The city has plenty of things it could sell or lease. It owns the profitable Milwaukee Water Works, which provides water to the city and surrounding suburbs. It also owns a number of parking structures, lots and nearly 7,000 metered spaces.

The task force report contemplates that the pension system could even be the entity that leases the properties.

Chicago’s 75-year parking meter lease, which netted the city $1.16 billion in 2008, has come with all kinds of drawbacks. The city has to pay the vendor to close metered spots for street festivals, it can’t remove meters without replacing them in kind elsewhere and it’s depriving the city of all kinds of revenue. The private company, as of 2020, already generated enough revenue to cover its upfront payment with 60 years left on the lease.

“The gold standard is the Indiana Toll Road where the State of Indiana really came out ahead on that deal,” Szopinski said.

6. Through collective bargaining as required by law, or policymaking, adjust retirement benefits and pension plan design for employees hired in the future.

The city could save money in the long run by reducing the cost of living adjustment awarded to pensioners. But there are protected groups which would limit the viability of such a proposal. The 2000 Global Pension Settlement protects pre-year 2000 employees and Act 10 effectively protects employees hired before Nov. 3, 2011.

“I think it’s 75% of the total pension liability has already been earned, so it has to be paid,” Szopinski said.

Changes could save the city money in the future, but that future is many years away.

7. Use Pension Obligation Bonds to “catch up” to full funding and more efficiently finance pension obligations without cutting services

Pension obligation bonds are a high-risk maneuver where the city would borrow hundreds of millions of dollars and attempt to earn a greater return by investing the proceeds. Borrow at 5%, hope to earn 7.5% in the market, pocket 2.5%.

“If interest rates go the wrong way the banks could own you,” said Kovac. “It’s a huge risk.” Pension obligation bonds come with a higher interest rate and would likely negatively impact the city’s general borrowing ability.

“It’s market timing,” said Murphy.

Milwaukee County implemented the strategy in 2009 and given the market timing to date, has come out ahead. “They got lucky,” said Yaccarino. “There are probably 10 times as many examples of pension systems that lost money by doing this.” And the county still faces a risk. Any large market pullback could undo years of positive returns.

Szopinski said it could be part of a solution, but not whole situation.

8. Seek and support State legislation allowing the City a local option sales tax to increase revenue for both pension costs and critical City services.

A 2017 Wisconsin Policy Forum report found that Milwaukee was the only one of 40 peer cities that didn’t have a direct sales tax. The city is uniquely dependent on the state, and the state is increasingly squeezing the city by cutting shared revenue payments and capping property tax revenue.

A 1.5% sales tax for the city would generate an estimated $131 million per year, enough to cover the pension liability and fund additional services.

In 2003, the state shared revenue formula (originally intended and used for more than a century as a rebate of income taxes) allocated $249.9 million to the city. In 2021, it is providing $229.4 million, a $20.5 million reduction.

If the 2003 figure was adjusted for inflation and left as is, the city would be receiving an additional $118.5 million annually. That creates a massive hole in the city budget.

9. Seek other State-allowed sources of local revenue, including increasing the hotel/room tax rate, other new taxes, marijuana legalization, sports gambling, or increased Payments In Lieu of Taxes.

Could the city secure money via a revenue source other than a sales tax? Maybe.

The 7% city hotel tax now goes to the Wisconsin Center District as a result of the 1990s deal to fund the convention center’s original construction. The district also just increased the countywide tax from 2.5% to 3% to partially fund an expansion of the center. The city used to get a third of the city tax, approximately $5 million, in 2019 and Ald. Robert Bauman led a failed attempt to get it back early in 2020.

Other options are out there, but all would require state support. Legalizing marijuana or sports betting in a way that directs proceeds to the city could provide additional funding.

Another option calls for local support. If all of the owners of tax-exempt property, including hospitals and churches, made payments in lieu of taxes the city would receive $50 million more annually.

10. Seek dedicated, increased allocation of Shared Revenue specifically for public safety

One less conventional funding option in the proposal is for the state to increase the city’s shared revenue payment and dedicate it for public safety expenses.

Suggested by AFSCME district council #32 president Mark Pelzek, the idea is intended to appeal to the Republican-controlled Wisconsin State Legislature.

“Even a one-time increase in the Share Revenue base of 5% would allow considerable restoration of staffing and capacity for public safety,” says the report.

It would give the city more than $10 million annually, which isn’t enough to solve all of the city’s issues but helps.

11. Utilize shared services to reduce City costs and tax levy growth

Could you combine the Milwaukee Fire Department with the southern or western suburbs? It’s an idea that would mirror the North Shore Fire Department. What about emergency medical services?

The Milwaukee County libraries are already part of a federated system that shares resources.

“I think it’s a good idea, the spirit of it no one has an objection to, but it’s an idea the mayor and council need to see if it could help with pension funding,” said Szopinski of any combined services.

Yaccarino said the city ran into union roadblocks on potential fire or EMS consolidations with both Glendale and Greendale in the early 2000s. “The unions got out there and said people could die if we do that,” he said.

The extent of any savings is unclear.

12. Leverage and lobby for Federal funding, including relief funds from the American Rescue Plan, other direct aids, to offset growing public safety and other City budget costs

American Rescue Plan Act (ARPA) funds cannot be used to fund pensions or rainy day funds, but the city could use some clever accounting to indirectly bill up a reserve fund. “The mayor wants to be fiscally responsible,” said Szopinski. The council has only approved a handful of expenditures from its $394.2 million ARPA allocation.

Other federal funding sources might not come fast enough to make a difference.

What’s Next?

The city’s lobbying team is currently discussing options with state officials, with proposals including a joint solution to pair a new, city sales tax with pension reform.

But the discussion didn’t get into specifics. “I am not saying we are sitting idly, but we don’t have a specific one at this time that we are solely devoting time to,” said Yaccarino. “We don’t have a consensus on any of these.”

“I have been concerned from the beginning that anything from the state could include poison pills,” said Kovac, who also serves as a representative on the pension board.

Alderwoman Milele A. Coggs said she would like to see the discussion broaden to include more council members, and ultimately the public. Murphy supported sending the communication file to the Steering & Rules Committee.

The committee chair said there was an urgency to keep things moving.

“Sooner or later, not all of us are going to be at an embassy in Luxembourg, we are going to have to face the real world,” said Murphy. “We are going to have to vote on this.”

Task force members included Kovac, Hooper, Yaccarino, Pelzek, Comptroller Aycha Sawa, labor negotiator Nicole Fleck, city employees’ retirement system CEO Jerry Allen, deferred compensation executive director Beth Cleary, firefighters union president Mike Bongiorno, Milwaukee Police Association vice president Andy Wagner, Milwaukee Police Supervisors Association vice president Carmelo Patti, former budget director (retired) Mark Nicolini, VJS Construction Services senior project manager Gina Spang, former assessment commissioner and Milwaukee Retirees Association vice president Mary Reavey, Department of Neighborhood Services inspector Ron Roberts and Milwaukee Retired Fire & Police Association president John Barmore.

“It was a really good group and I think the mayor is thankful we got that entire group of stakeholders together,” said Szopinski.

The group was supported by Szopinski, budget office staffer Molly Christianson and assistant city attorney Patrick McClain.

And what happens when the solution is implemented?

“I guarantee if anything major happens, we will get sued,” he said, referring to the city, state and pension board. That also was the opinion of McClain in April.

A full copy of the report is available on Urban Milwaukee.