The Ins and Outs of Milwaukee’s Financial Future

Milwaukee City Hall. Photo by Jeramey Jannene.

As the City of Milwaukee stares down a 2025 fiscal cliff that could result in 25% of its workforce being laid off, the most important decisions about its future are being made 75 miles west in the Wisconsin State Capitol.

And not everyone in Madison is on the same page.

The Wisconsin State Assembly passed a proposal last week to grant the city a new 2% sales tax as part of a larger proposal to expand shared revenue payments to financially-strapped cities across the state. But that action, which included three Republicans joining all Democrats in voting in opposition, could be a hindrance.

The Assembly proposal, Assembly Bill 245, contains a number of challenging provisions for the city, including minimum police spending levels, a requirement that local voters approve the sales tax in a referendum, restrictions on approving additional spending and a host of non-fiscal policy constraints.

Wisconsin Senate Majority Leader Devin LeMahieu (R-Ootsburg) said he expected his caucus to likely drop the referendum requirement, removing uncertainty from the process that city officials have raised concerns about, and could make other changes to the bill.

But Assembly Speaker Robin Vos (R-Rochester) said his caucus is “done negotiating” and could vote to “non-concur” with the Senate’s bill, setting up the need for a conference committee to attempt to reconcile different versions of the proposal. “We are not going to take changes. We are not going to change the bill substantially,” said Vos in a press conference before the vote Wednesday evening.

“There are two houses in the state Legislature. It’s unfortunate that he’s drawing a line in the sand now with his version of the bill now and stopping negotiations on a bill that not everybody is in agreement on,” said LeMahieu during a media briefing. The Senate is expected to review its version of the bill in the next two weeks.

Prior to the Assembly vote, Governor Tony Evers expressed optimism that a compromise proposal could eventually be reached, but he also has threatened to veto the legislation without changes.

The City of Milwaukee faces a $156 million structural deficit in 2024, driven by rising pension costs, a state prohibition on enacting new revenue sources or increased property tax revenue and long-flat shared revenue payments, the state system to rebate income tax payments to municipalities.

A Wisconsin Department of Revenue report estimates the city would receive $193.6 million annually from the new tax. The city does not currently have a sales tax.

Milwaukee County, which would receive a new 0.375% sales tax, would receive $72.6 million annually. The county currently has a 0.5% sales tax. As a result of the two new taxes, the sales tax in the city would be 7.875%.

There is a need to act relatively quickly. The proposal would substantially impact the biennial state budget, which is to be completed this summer. Republicans have kept the proposal increases outside of the budget itself because it prevents Evers from being able to use his line-item veto.

Under the Assembly bill, all municipalities in the state with less than 110,000 residents would receive a 15% minimum increase in annual shared revenue payments. Milwaukee and Madison would receive only 10%. Under the unusual way the increases are structured, the smallest cities would be the biggest winners. Milwaukee would receive an additional $21.75 million.

City Officials React

“We appreciate the efforts the Assembly has made thus far, but, as with any negotiation, I am optimistic that we will see additional improvements,” said Council President José G. Pérez in a statement May 18. “In my view, this is certainly not the end.”

A Common Council committee spent more than four hours in a closed session meeting Monday discussing the progress at the state and the city’s possible response.

“This is a 30-year problem we have to solve, and we are this close to getting it done,” said Mayor Cavalier Johnson while holding two fingers an inch apart during a press conference Friday, May 19.

The mayor said his focus remains on improving the city’s relationship with the state for the benefit of residents, tourists and suburban commuters. “We need to have city services, including law and protective services who are able to support those constituencies.”

The state’s current fiscal structure has the City of Milwaukee receiving effectively nothing in direct revenue from major events like the planned Republican National Convention or Milwaukee Bucks playoff games because it does not have a sales or income tax.

Johnson said he maintains that instead of a referendum, the proposal should be “enabling legislation” that allows the Common Council to vote to enact the tax. Vos has indicated he would allow a unanimous vote of the Common Council. “I just hope that in the end we are in a stronger position to keep our services running, including police, including fire, including libraries and other important, critical services that we provide to citizens across the city of Milwaukee each and every single day,” said the mayor.

The mayor said he expects a compromise to be reached.

Why Milwaukee Has Financial Issues

Milwaukee’s fiscal issues are driven by three primary factors: growing pension costs, substantial state restrictions on raising new revenue and declining state aid.

Adjusted for inflation, the City of Milwaukee alone estimates its annual shared revenue proceeds are down $155 million annually since 2000.

The City of Milwaukee has an estimated $156 million structural deficit in 2024.

Unlike many other pension systems, it has a city charter and court-established requirement to fund its pension system fully. To avoid annual shocks, the city switched to a five-year smoothing formula during the Great Recession. And as city officials have warned for several years, the contribution will reset next year at a level nearly double its current state.

The city must contribute $132 million to fund the system next year, up from $71 million in 2023. A large driver of the cost increase is an actuarial decrease in estimated investment returns from 8.24% to 7.5%, which compounds the amount of money needed to fund the system years into the future. The system, according to the Wisconsin Policy Forum, was 83.4% funded heading into the 2023 budget adoption cycle and exceeded the funding level for many other systems.

The legislation working through the Capitol would close the city and county pension systems to new entrants, with new hires added to the state-run Wisconsin Retirement System. City budget director Nik Kovac has warned that such a change, while desired, would increase costs in the short run because the state uses a lower assumed rate of return on investments. Long-term the city could see a benefit because the system is not required to be fully funded and has different governing rules.

The existing city pension system would continue to operate until it has fulfilled all of its obligations to retired city workers. Under no scenario publicly contemplated by city or state officials are benefits at risk. A combination of state and federal laws provides substantial protection for employee pensions.

The city was granted a reprieve with a $394.2 million federal grant from the American Rescue Plan Act. But its ability to use the grant to plug its structural deficit will effectively end next year. Through a series of budget maneuvers, it has stashed $30 million of the grant into a pension reserve fund.

The fiscal issues aren’t exclusive to Milwaukee, but the city’s pension funding requirement makes it the most acute case.

From Rhinelander to Muskego, local officials have increasingly raised concern that the fixed amount of funding provided for the past two decades was straining municipal budgets. An effective cap on property tax collections, which limits increases to the value of new construction, also substantially limits how municipalities can respond to the issue while inflation increasingly has made the issue more pronounced.

Policy Restrictions

In addition to the referendum requirement, there are a number of policy restrictions in the Assembly bill including an effective prohibition on expanding the streetcar, a gutting of the authority of the Fire & Police Commission and the placement of police officers inside Milwaukee Public Schools.

The bill blocks the city from using “moneys raised by levying taxes” for developing, operating or maintaining the streetcar system. The city has used tax incremental financing districts as a local match for a federal grant to build the system. It relies on parking revenue and sponsorships to operate the system.

The Assembly proposal would transfer the policy-setting authority of the citizen-led Fire & Police Commission, long-billed as one of the most powerful such bodies in the country, to the Common Council and institute a two-thirds vote requirement. The “control and management” of the two public safety departments would be given to the respective chiefs.

The commission, which would retain the authority to hire and fire the chiefs, would also need to add two members, one each from lists provided the rank-and-file police and fire unions. The mayor currently has the authority to appoint up nine members. Johnson has publicly opposed this provision.

The “level of law enforcement and fire department staffing” would also need to be maintained at “at least the current level.” The city has cut personnel levels in both departments due to what then-mayor Tom Barrett described as “fiscal, not philosophical” considerations. The police department budget has increased because officers are exempt from Act 10 and have received substantial raises compared to other city workers due to their collective bargaining protections.

Twenty-five police officers would need to be placed within schools. The school board had voted to remove officers in 2020 at advocates’ request but continues to employ security personnel and officers routinely visit schools.

An additional provision of the bill could have a subtle impact years down the road. The bill makes any “new program spending or position authorizations” subject to a two-thirds vote of the Common Council.

A COVID-19 legacy item is also included. Local health officers statewide would be prohibited from issuing health orders to close a business for more than 14 days to prevent a disease outbreak without a local government body voting to approve the change.

Advisory referendums by local or county governments would be banned statewide.

A handful of other policy requirements with limited impact on Milwaukee, including quarry regulations, are included in the bill.

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Related Legislation: Assembly Bill 245