Budget gaps in Wauwatosa's finances
"The message isn’t necessarily rosy," Finance Director John Ruggini says. Water rate increases, a new transportation utility charge, police pensions, and why the City feels so crunched for money.
I.
Businesses get a bad rap in some quarters, but one advantage of a profit-seeking company is that if no one likes what it’s selling, it goes out of business. And there’s always other businesses popping up that promise to offer customers something even more valuable and worth their money, so the original company has to adapt…or it goes out of business.
Governments often don’t experience the same competitive pressures. One way governments used to traditionally compete is by going to war. If one country isn't working well, or fails to sufficiently inspire its citizens to fight for it, or lacks the wealth and expertise to manufacture sophisticated weapons, then another government can roll in and try to replace it.
But countries don’t go to war as often as they used to (citation needed) and smaller governments within a country go to war with each other even less frequently. On net I am a big fan of this, but one negative consequence is that it can take a long time for ineffective governments or governments with ineffective policies to be replaced by more effective ones.
Sure, if a city or country does something really annoying and obvious like make a special tax just for millionaires, sometimes the millionaires will leave, but for many people moving is very costly and it’s often difficult to understand why your local government always seems to charge just a little bit more to do a little bit less than it did the year before, or why it spends an inordinate amount of time arguing about things that aren’t particularly important to you while things you do care about get ignored. And the government knows it’s expensive for you to move, and they know it’s hard for you to figure out what’s going on, and they know you’re going to pay for it anyway or else they’ll take your house.
This is one way to understand why the State of Wisconsin limits the ability of local governments to raise property taxes.
The City of Wauwatosa provides a number of services—police officers to patrol the streets, issue parking citations, and solve crimes; and a fire department to put out fires, retrieve cats from trees, and rescue children from wells. The City also maintains roads, provides running water, passes laws that try to ensure people are treated fairly, creates parks for kids to play in, sends garbage trucks to pick up your trash, and renovates buildings for the local curling club to hold practice in. To accomplish these things, it must raise money from the residents of the City who don’t like crime, lose their cats in trees and children in wells, create trash, and either watch, participate in, or appreciate that other people like to watch or participate in…curling.
My hour of research into the history of property taxation in Wisconsin, which mostly comes from this, this, and this, reveals two things: (1) People kind of hate it, and (2) the state has always tried to limit it. The sentiment seems to be that if local governments had their druthers, they’d continue to raise taxes but provide less and less in return.
So, after a period from 1998 through 2005 when property tax levies increased annually at a rate of 5.2% despite inflation only running at 2.2%, legislators finally passed a law that said local governments could only increase the property tax level by the greater of net new construction or some variable "floor" which ranged from 2%-3.86%1. In 2011, the "floor" was eliminated entirely and cities could only raise property tax increases if the amount of taxable property increased. Miraculously, property tax rates stopped increasing so quickly.
Unfortunately, these levy limits were imposed when there was a lot more new construction than there is today. At a statewide level, one worry is that the limits can force stagnating communities into a downward spiral. As new development declines, community leaders can no longer afford to maintain services, the reduced services make the city less attractive to new development, and the cycle continues.
At the level of individual cities, the worry is that increases in the cost of services will outrun the rate of new construction and the city will just become less and less effective as it’s forced to lay off employees, cut services, or defer needed maintenance.
Which is kind of what the Finance Director for the City of Wauwatosa, John Ruggini, expressed worry about during his presentation of the 5-Year Budget Forecast to the Financial Affairs committee last week:
The private sector has natural competitive pressures built in that help drive organizations to become more efficient. They’ve got to keep their prices competitive to stay profitable. In the public sector we don’t have that pressure. So, I think it’s good through the budget process to create a level of pressure on the departments to continue to innovate. The problem is the amount of pressure that we’re putting on the departments is too high. It’s causing them to do things that are probably in the long run not in the best interests of the City. […]
There are certainly things happening within departments, especially through technology, that are helping us become more efficient. It’s just that the magnitude of what we’re asking the departments to do is greater than what they can achieve through those investments.
On the upside, Mr. Ruggini did note that, adjusted for inflation and population growth, the City’s property tax levy per capita has been mostly flat for the last 20 years. And as of right now, the City doesn’t raise as much revenue as the levy limit theoretically allows. This slack has allowed it to adjust its spending up or down as necessary to maintain the smooth and consistent provision of services.
But this slack is slowly disappearing as costs to provide services increase at a faster rate than new construction and if nothing changes Wauwatosa will be charging the maximum amount in property taxes that it is allowed to by 2027. Thereafter, if net new construction in 2027 is 0.2%, then the City can only increase property taxes by 0.2%2. City Administrator Jim Archambo also chimed in to note that a 1% increase in net new construction is about $75 million dollars which he said was about 500 new housing units or 400,000 sq. ft. of office space. [My note: 500 homes for $75 million comes out to $150,000 per house which seems too low but point taken]
The net result is that expenses will continue to rise, revenues will also rise but more slowly, and the City will be operating in the red again, and again, and again.
The center column is the budget gap (how much expenses exceed revenue) as estimated in last year’s 5-Year Forecast from 2022-2026. You can then compare it to the budget gaps estimated in this year’s 5-Year Forecast for 2023-2027 to see if projections are getting rosier or darker. Things mostly seem to be getting worse. The budget gap over the 5 years from 2022-2026 was about $3M and the total budget gap from 2022-2027 is about 40% higher at $4.3M.
II.
Why? The Finance Director mentioned a number of things: inflation is running high, increased police turnover is complicating budget projections, the ambulances are responding to more calls and getting reimbursed less, and health insurance costs are increasing. But the biggest contributors to the increased budget gaps are the City hitting its levy limit (discussed above and resulting in the $1.1M budget gap in 2027) and an unanticipated increase in the City’s required pension contributions for its employees in 2023.
→ Pensions are pricier. To pay for a pension, each month the employee pitches in some money and the employer pitches in some money and it all gets sent to the Wisconsin Retirement System (WRS). WRS invests it in various things that hopefully provide a decent-enough return so that in 30 or 35 years they can give it back to you in the form of an annuity until you die. On the one hand, the stock market has done much better than the WRS anticipated, so you’d think that employers and employees might have to put in less money going forward. You’d be wrong, because on the other hand, the WRS thinks that markets will perform much worse going forward than they have in the past, and so they actually want employers to pitch in more money to offset lower expected future returns. This will leave the City with $450,000 less to spend on other things.
John Ruggini thinks it’s hard to be upset though, because “in fact, the Wisconsin Retirement System is one of the best run, if not the best run pension systems in the country. It’s 100% funded. There’s no unfunded liability. But one of the reasons they’ve done that is they’ve been very diligent about maintaining assumptions.”
→ Inflation is high and employees are getting a pay cut. This wasn’t the way it was presented, and it will probably feel a bit different to the employees, but if City employees get a cost-of-living (COL) pay increase of 3.0% and everything in America is 8.5% more expensive, then what they’re really getting is a 5% reduction in pay. Normally, Mr. Ruggini said, the Congressional Budget Office does a 10-year projection of inflation and interest rates which the Finance Department just copies and pastes into its excel spreadsheet. Unfortunately, that report was published in February and is already out of date, because inflation has been increasing and is higher than it has been in decades. “There’s no way budgetarily we can afford an 8.5% cost-of-living increase. Nor do I think we really need to. But we do need to be competitive.”
One reason I can think of for why the City might not “need to” worry about matching COL increases to current inflation rates is that other employers aren’t either, and so a lower increase will still make employment here competitive compared to surrounding municipalities.
Another reason might be that 8.5% inflation doesn’t really feel like everything is 8.5% more expensive, especially in the short-term. For example, measurements of inflation include increases in the cost of housing but most people in Wauwatosa have a fixed-rate mortgage on their homes, so while housing prices might increase, they’re not actually paying any more.
→ Police officers are special and kind of expensive. For most City employee pensions, the City pitches in 6.8% of their monthly pay and the employee contributes the same amount. Police officers also contribute 6.8% but the City puts in…well, a new union contract hasn’t been negotiated yet, so the Finance Director didn’t even want to say, but it’s “significantly higher.” Partly, this is because police officers can retire much earlier than regular city employees so monthly contributions need to be higher to support this. Partly, it’s probably because they have a union.
One way the Police Department could be less of a resource sink is if they generated more revenue from parking tickets and citations. But, Mr. Ruggini said, he doesn’t want to tell the Police Department to start issuing more citations lest the system become more about revenue generation than public safety, a problem he mentions that occurred in Ferguson, MO several years ago.
I’m not sure why he’s worried about undue influence though, since he also mentioned that there has been a 35% reduction in citations since 2019. He doesn’t speculate as to why other than to note that it’s a national trend. I also noted this reduction previously and it appears to be much larger than 35%.
Mr. Ruggini also mentioned that in addition to COL pay increases, employees get pay raises at certain pre-determined points in their career—after 4 years, for example, or after 7 years, or both. The police department has relatively few of these tenure-based pay raises but they involve bigger pay jumps and when projecting personnel costs, none of this is accounted for. Instead, they budget for a salary in the middle of the pay range knowing some people will make more, some will make less, some people will retire, and new people will be hired at a lower, entry-level salary. And it all kind of washes out.
Unfortunately, he added, because there has been so much turnover recently in the Police Department, over the next 5 years, some big bumps in pay for newer officers won’t be offset by the retirement of more experienced and more highly-paid officers, and pay will exceed the budgeted amount. I’m not sure why he can’t take this into account, but I think his point is that for the purposes of the 5-year projection he’s presenting to the Financial Affairs committee, the budget deficits he presents are actually understated and would be larger in reality.
→ Ambulance runs are increasing. More ambulances are being called because residents in Wauwatosa are getting older. This is nice, because it’s a source of revenue. However, older people also use Medicare which has lower reimbursement rates, so I’m not really sure what the impact is.
Relatedly, Mr. Ruggini noted that the City of Wauwatosa doesn’t “balance bill”3 residents of the City or Milwaukee County as a whole. They did this in the hopes that other municipalities would reciprocate their generous and kind gesture, but no one has. If you live in Wauwatosa and have a heart attack in West Allis and need an ambulance, you’ll probably get balance-billed.
→ Health insurance is becoming more costly. The City is actually mostly self-insured, which means they don’t pay premiums to a third party to cover most employee medical expenses. However, they do have catastrophic insurance through a reinsurer, which will cover employee medical expenses that exceed some threshold—Mr. Ruggini said $85,000—and the price of this insurance goes up by about 10% each year.
On the other hand, he did express pride in the City’s efforts to maintain overall health insurance costs. “We’re paying less in health insurance claims adjusted for inflation than we were in 2001.” The City also distributed a dividend to employees of $500 last year, because insurance costs were so much lower than budgeted.
→ The City wants to reduce its reliance on debt to finance capital improvement projects. In the past, the City limited debt payments to 10% of its total expenses. They’ve recently increased that limit to 15% of total expenses due to anticipated capital improvement expenses, but also committed to cash-financing 40% of the capital budget by 2030. But to do this, they’re going to need to generate some additional revenue.
III.
The budget gap grows only if the City doesn’t make any changes in the services it provides and the money it spends to provide them. Of course the City has done, and will do, many things to balance the budget as the years progress. Mr. Ruggini mentioned that ARPA funds provided a one-time fix this year. He also mentioned continuing investments in technology and IT infrastructure improvements that have made certain government processes more efficient and less labor intensive and which provide cost savings year after year. And of course, the City does what it can to encourage more development that increases the levy limit.
He also mentioned two revenue-generating items specifically:
→ Higher water bills. To reduce its reliance on debt to finance capital improvements, Mr. Ruggini mentioned that there will be a proposal in the next few weeks to increase water rates. He didn’t elaborate on this.
→ A new Transportation Utility fee. Also a measure to reduce debt-funding of capital improvements, there will be a proposal in December to remove road maintenance expenses from the General Fund budget (which is mostly paid for with property taxes) and create a new Transportation Utility fee in the same way that there is separate fees to cover water, storm, and sanitary utility costs.
He described the Transportation Utility as a way to isolate road maintenance from the rest of the budget and charge people for it. They had tried to do something similar five years ago through a local “wheel tax,” but the idea wasn’t approved by the Common Council. While the alders agreed that the City needed to do something to help pay for road maintenance, most didn’t like the wheel tax since it was only paid by residents and not businesses and non-profits.
In contrast, a Transportation Utility would charge a portion of road maintenance costs to residents, businesses, and non-profits based on national estimates of how many trips different types of homes, businesses, and non-profits generate. Owners of single family homes might all be charged one amount, while restaurants, car dealerships or gas stations get charged another.
On a side note, this seems to be a way for the City to bypass levy limits by making it a fee rather than a part of property taxes? But I wonder why, if they’re allowed to do this, they couldn’t just do this for everything. Why, for instance, can’t they make a separate Police Utility fee or Park Preservation fee so those weren’t subject to levy limits either?
Ald. Arney also asked Mr. Ruggini how this tax would affect individuals who don’t drive or who are low-income to which he replied that while the tax would be regressive since it’s a flat tax4, one mitigating factor is that it would likely shift some of the burden from residents to owners of commercial properties so residents might pay less than they do now. He also expressed a desire to structure the tax in such a way that it encourages behavior the City would like to see more of. So, if more car trips lead to more wear-and-tear and more maintenance costs, businesses that encourage more employees to work-from-home or commute to work by bike could be offered a rebate.
IV.
At the end of the presentation, Ald. Arney said:
It sounds like the situation that we’re in is kind of an impossible situation. We’re being asked by the state to build our way out of service increases and that’s just not—and we are booming. We are highly desirable. So, I’m thinking about how, if this is so hard for us, what must it be like for others?
To which Mr. Ruggini replied:
What we’ve just been saying to the council internally, quite honestly, with the way politics are in the state, until northern Wisconsin communities have to start laying police officers and firefighters because of levy limits, nothing will change.
The fact that they distinguish between employer- and employee-contributions is kind of an accounting fiction, because over the long-run as the employer has to pitch in more money, it will probably lower the salaries it offers to new employees based on the tax incidence.
This is not quite true. The City could actually raise it’s property tax by 0.7%. This extra 0.5% is because the State allows cities to exceed the levy limit in order to cover its debt payments. The City currently projects that it will need to raise the property tax levy by an additional 0.5% year out to 2032 to cover its debt service.
If all owners of single family homes get charged $50 it will be more painful for low-income homeowners.
Thank you for this insightful newsletter. I am gaining a greater knowledge of the workings of the city government because of it. Your analyses are sincerely appreciated. Keep it up!