Milwaukee Faces Future Budget Challenges

BMO Tower and Milwaukee City Hall. Photo by Jeramey Jannene.

Even though Mayor Cavalier Johnson‘s proposed 2024 city budget doesn’t propose any notable cuts or staffing reductions, trouble looms on the horizon.

At a glance, Act 12, which awarded the City of Milwaukee more than $200 million in new revenue through a sales tax and increased shared revenue, appeared to erase the city’s fiscal woes triggered by rising pension costs and state revenue restrictions.

“After Act 12’s passage, it appeared the city would receive sufficient new revenue to avert a substantial structural gap at least for a few years. Yet it now appears that may have been overly optimistic,” says a new Wisconsin Policy Forum (WPF) report.

The city, which is currently reviewing the budget proposal, appears poised to get a reprieve on 2024 cuts because it is spending the remainder of a $394.2 million American Rescue Plan Act (ARPA) grant. Since the 2022 budget, the city has used the pandemic-related grant to avoid major cuts while it sought state help.

“While the city’s likely budget gap for 2025 will not be equal to the $110.3 million in ARPA funds that will disappear after 2024, a gap of $35 million to $45 million is not inconceivable,” says the policy forum. It’s a much smaller gap than without Act 12, when up to 1,300 jobs were expected to be eliminated, but Milwaukee will still find itself needing to alter how it provides services in 2025.

Act 12 granted new revenue, but it also imposed new costs on the city. Most notably, it increased the city’s annual pension costs by imposing a lower estimated rate of return on pension assets. The city’s annual pension payment is now $175 million, up from $100 million. Additionally, the new state law requires the city to pay for the increased costs ($6.3 million) for the government entities that rely on the city’s pension system, which includes Milwaukee Metropolitan Sewerage District and non-teaching employees within Milwaukee Public Schools. Unlike many other governments, the city must fully fund its pension system.

The 2024 budget includes a one-time cost of $25.5 million because the city’s upfront contribution was less than what was later actuarially required. That cost would have previously been spread over five years under a smoothing formula, but Act 12 eliminated the use of the smoothing formula.

The report does note that long-term the city’s fiscal health should improve because a key component of Act 12 was closing the city’s pension system to new entrants and placing new employees into the Wisconsin Retirement System. “In the short run, though, there will be growing pains,” says the report.

Complicating how the city will escape the looming budget gap, Act 12 requires the city to meet minimum police and fire staffing levels.

The report, however, isn’t entirely doom-and-gloom.

“In recognition of this year’s unique fiscal abundance, the proposed budget makes a number of important investments that are designed to shore up longstanding areas of need while reducing cost pressures in the future. For example, tens of millions of dollars are dedicated to a major restructuring of compensation levels for key city positions in an effort to make recruitment and retention more viable in a historically tight labor market. The proposed budget also seeks to build up critical reserve funds while using cash– instead of funds derived from borrowing – to carry out nearly $37 million in capital projects,” says the report. It notes, as city officials have repeatedly explained in budget presentations, that the 2024 plan also calls for leaving reserve funds untouched for the first time in years.

“While there is no question that the city’s financial outlook has dramatically improved, its long-term prospects appear shakier than they did when the Act 12 legislation was signed,” says the report. “That conclusion should intensify the efforts of city leaders to identify and implement budget efficiencies and service sharing options as early as next year.”

A separate study process, led by WPF, is already underway to identify areas where the City of Milwaukee and Milwaukee County could partner to save money and improve services.

The 21-page report, an annual analysis, was authored by WPF senior research associate Ari Brown and forum president Rob Henken. A Greater Milwaukee Committee study will also attempt to identify areas for improvement.

The Common Council will spend the month of October reviewing the budget and introducing amendments. A final budget is scheduled to be adopted in early November.

A full copy of the WPF report and a two-page summary are available on Urban Milwaukee.