The road to the fiscal cliff was paved with falling state aid, rising pension costs and narrow local tax options. Now Milwaukee’s cliff-dwelling city and county leaders are pleading with the state to build a new road in the opposite direction. But that means reversing more than a century of decisions in mere months.
The “fiscal cliff” is shorthand for the budget crisis confronting Wisconsin’s two biggest local governments. Within the next few years, their structural deficits – the gap between their existing revenue sources and their day-to-day expenses – will grow so large that both could be forced to slash vital services and lay off many of their employees. The jobs of law enforcement officers, firefighters, librarians, sanitation workers, public health nurses, bus drivers, parks employees and more – and the work they do – could be at risk.
Democratic Gov. Tony Evers has joined County Executive David Crowley and Mayor Cavalier Johnson in calling for the Legislature to boost shared revenue to all local governments and to authorize referendums to raise local sales taxes. Republican leaders who control the Legislature agree the 112-year-old shared revenue system is broken, but they want pension reforms and police spending guarantees before they hand over any new cash.
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On Tuesday, Republican leaders unveiled a bill containing a sweeping plan to overhaul the state’s shared revenue program and allow Milwaukee and Milwaukee County to enact new sales taxes – albeit with significant strings attached. The bill could come to a floor vote later this month, in time for the plan to be incorporated into the 2023-25 state budget, which is supposed to take effect July 1.
Wisconsin’s division of taxing and spending responsibilities between state and local governments has created an ideal environment for finger-pointing. But piecing together the nonpartisan research of the Legislative Fiscal Bureau and the Wisconsin Policy Forum, along with news stories and budget data, shows a crisis decades in the making, linked to many of the biggest local, state and national news events of that time.
FROM SHARING TO CUTTING
The shared revenue system was created in 1911, when Wisconsin adopted the nation’s first state income tax. Lawmakers prohibited local governments from imposing their own income taxes but compensated them with a generous share of the new statewide tax: Municipalities would get 70% of the income tax revenue collected within their borders and counties would get 20%. With the remaining 10%, the state would phase out its reliance on property taxes, leaving room for local governments to increase their own levies to expand services.
Although the original formula evolved into more of a need-based system, shared revenue continued to grow every year for most of the 20th century. Local governments also weren’t allowed to impose their own sales taxes when the state did so in 1962, but municipalities were authorized to levy hotel taxes and local vehicle registration fees, or wheel taxes, in 1967.
By the 1980s, however, counties were protesting against unfunded mandates, primarily the state’s requirements for them to provide a justice system and social services without full
reimbursement. In response, the state brought local prosecutors onto its own payroll, authorized county wheel taxes and loosened restrictions on county sales taxes, leading Milwaukee County to impose its own sales tax in 1991.
But state officials were facing their own budget challenges, as Medicaid and prison costs skyrocketed. At the same time, then-Gov. Tommy Thompson and the Legislature had pledged to hold down school property taxes by paying two-thirds of K-12 districts’ operating costs.
“It really was a matter of priorities, and so something had to give,” Policy Forum President Rob Henken says.
State officials froze shared revenue, starting in 1995, the same year that all of Milwaukee’s hotel tax revenue was redirected to the new Wisconsin Center District. Running short of options to cover their own rising costs, local governments turned to property tax increases, sparking protests over the burden on Wisconsin property taxpayers.
“It wasn’t because local governments were spending money hand over fist,” Henken says. “It was because of (stagnant) shared revenue.”
The Legislature responded by slapping limits on local governments’ property tax levies, starting in 2003. Subsequent state budgets cut shared revenue in 2004, 2010 and 2012, including an extra cut to Milwaukee County after the state took over its child protective services. The county gave up another $4 million a year as its contribution to the 2015 deal to build Fiserv Forum.
A system originally designed to boost local revenue and expand local services had become exactly the opposite. Wisconsin’s unique choice to limit local governments to two primary funding sources – property taxes and shared revenue – had worked as long as both could increase to meet rising costs. Now both were sharply constrained, and local officials found their budgets squeezed.
From 2000 to 2023, shared revenue fell 6% to $229.7 million for the city, and 27% to $27 million for the county, while inflation rose 65%. In the same period, state aid to the county for human services, highways and transit grew only 8%, to $106.1 million, including a 50% transit aid cut that GOP lawmakers pushed through in 2022 after the bus system won $215 million in federal pandemic aid.
When Republican Scott Walker was governor from 2011 to 2019, he said he gave local governments the tools to handle aid cuts, by ending nearly all collective bargaining rights for most public employees. But that 2011 legislation exempted law enforcement officers and firefighters, whose pay and benefits are among the city’s biggest expenses. The city has cut its other employees’ wages and benefits by $107 million a year, while similar steps have saved the county $120 million a year.
Since 2000, the county has eliminated 1,400 jobs, while the city has trimmed its payroll by 1,138 employees, largely by attrition in both cases. The county parks workforce alone dropped from 1,050 in 1989 to 450 in 2019. City budget director Nik Kovac says elected officials tried to shield police and fire personnel from job cuts as long as possible, but eventually ran out of other options. More than 60% of the city reductions still came from other agencies.
IN SEARCH OF CASH
With property taxes capped and shared revenue stagnant, the city expanded user fees. In addition to their longstanding water and sewer bills, Milwaukee residents are now charged separately for
garbage collection, snow and ice removal, streetlights and extra garbage carts, along with a wheel tax imposed in 2008. Revenue from those fees grew from nothing in 2000 to $78.3 million in 2023.
Because of the different services it provides, the county doesn’t have that option, Crowley notes. But its sales tax, limited by state law to 0.5%, was nonetheless growing with inflation and economic activity. From 2000 to 2023, sales tax revenue rose 70%, to $90.7 million.
Overriding a veto by Walker, who was then county executive, the County Board called a 2008 advisory referendum to ask if the state should let the county triple its sales tax to 1.5% to pay for parks, transit and paramedics. Voters narrowly backed the idea, 51% to 49%, prompting then-Mayor Tom Barrett to argue the city also should get sales tax revenue for its police and fire departments.
State lawmakers authorized a boost to 1.15% for transit and public safety, but then-Gov. Jim Doyle vetoed the budget provision, saying he wanted a broader transit authority than the one-county bus agency it would have created. The Democratic leader failed to work out a new deal before Walker’s Republicans took over state government and outlawed regional transit authorities.
Other states don’t restrict city and village revenue as tightly as Wisconsin does. Here are their funding sources in context:
- Property Tax: Wisconsin municipalities rely more on property taxes than any of their Midwestern counterparts. Nationally, Wisconsin ranks seventh in municipal property tax dependence, and none of the other top 10 states limits levy increases as much as Wisconsin does.
- Sales Tax: Although 68 of 72 Wisconsin counties impose 0.5% sales taxes on top of the state’s 5%, only Wisconsin Dells and six other “premier resort” communities can levy municipal sales taxes. Other states allow more municipal sales taxes, which bring in more than property taxes in Missouri and Kansas. Combined state and local sales tax rates are higher in nine other Midwestern cities than in Milwaukee.
- Fees: Even with the fee increases and new wheel taxes of recent decades, Wisconsin municipalities charge less than many of their counterparts. In seven other Midwestern states, fees are the largest source of municipal revenue.
- Income Tax: Like most states, Wisconsin doesn’t allow local income taxes, but they account for 42% of municipal revenue in Ohio. Missouri allows its two biggest cities, St. Louis and Kansas City, to impose income taxes.
- State Aid: While Wisconsin has cut state aid to municipalities, it’s still the top revenue source for this state’s school districts. In Illinois and North Dakota, it’s the largest source for cities and villages.
Meanwhile, the city was careening toward its first fiscal cliff. For more than a decade, healthy investment returns had allowed the city to fully fund its pension system without contributing any tax dollars. That changed when the 2007-09 Great Recession sent stocks tumbling. Barrett and the Common Council scrambled to build up reserve funds to cushion the impact of eight-figure contributions starting in 2010. Henken says federal stimulus aid helped save the city.
The county was still recovering from its own pension mess – the extraordinarily generous retirement benefits that triggered a scandal and forced then-County Executive Tom Ament to resign in 2002, sweeping Walker into that office. Even after years of corrective measures, Crowley says, the effects of the 2000-01 benefit boost are still a factor in county pension costs. And as with the city, Henken says slumping investment returns also drove up the county’s employer contributions.
Driven by those big outlays, 2023 retirement expenses have grown to $143.9 million for the city and $106.4 million for the county. Both local pension systems were hit again in 2022, when the COVID-19 pandemic, the Russian invasion of Ukraine and the Federal Reserve’s inflation-fighting strategy combined to upend the market. The resulting investment losses will push employer pension contributions even higher in upcoming years. Shifting new employees into the Wisconsin Retirement System – like their counterparts statewide – would be a long-term improvement even if it doesn’t solve the short-term problem, say Crowley and chief city lobbyist Jim Bohl.
Until now, various pots of federal aid – most recently pandemic aid – have helped keep the city and the county transit system solvent. But by 2025, that aid will be exhausted and city reserves will be empty, Kovac and Henken warn. By 2027, the county will no longer be able to afford non-mandated programs like parks and the zoo, Crowley says.
CHANGE OF HEART
As the scope of the problem became clear, sales tax supporters won some surprising allies. One was the Metropolitan Milwaukee Association of Commerce, which had joined Walker in opposing the 2008 referendum but by 2014 was calling for a new tax to support county parks and cultural institutions. Efforts to link such a tax to Fiserv Forum construction failed to gain GOP support, as did talk of extending and repurposing the five-county 0.1% baseball stadium sales tax, which ended in 2020.
Another convert was Walker’s successor as county executive, Chris Abele, who originally opposed new or increased taxes and called for shared revenue increases instead. Abele stunned supervisors by proposing a wheel tax, which they adopted starting in 2017, and again in 2019 when he joined Barrett and other local leaders in lobbying for a higher sales tax. In 2020, Abele told Milwaukee Magazine that he believed further service cuts and bus fare increases were unsustainable, and that legislators had told him a major boost in shared revenue would blow too big a hole in the state budget.
Those lawmakers – the Republicans who still control the Legislature – remain the decisive audience to persuade. Johnson and Crowley have wooed them tirelessly, capitalizing on good will from the city’s agreement to host their party’s 2024 national convention. Signs of movement have slowly emerged, such as when Assembly Speaker Robin Vos joined the local leaders at a January swearing-in ceremony for new GOP Rep. Bob Donovan, the former Milwaukee alderman who lost mayoral races to Barrett and Johnson.
If a sales tax increase is approved, Crowley says, it would give local officials another incentive to boost the local economy, and Wisconsin’s economy with it.
“Wherever Milwaukee goes, that’s where the state goes,” Crowley says.
Not everything you hear about city and county budgets is true. For example:
Myth: If they did an audit, they would find enough waste and fraud to balance their budgets.
Reality: Independently elected city and county comptrollers’ staffs audit all agencies and investigate citizens’ tips about waste and fraud. Auditors find most tips are unsubstantiated.
Myth: The city could solve all its budget problems by getting rid of the streetcar.
Reality: Because it’s funded by parking fees and sponsorships, The Hop doesn’t use property taxes or shared revenue to pay its $4.7 million annual operating costs, which are less than one-third of 1 percent of the $1.7 billion city budget. Ending service would require the city to repay $69 million in federal aid.
Myth: Milwaukee has defunded the police.
Reality: Although the officer headcount has been reduced 14% by attrition since 2009, police spending rose 7% in 2023 and has doubled since 2000. Milwaukee, like most large cities, spends more on police than on any other department; one-quarter of city employees are police officers; and retired officers account for more than half of city pension benefit costs.
Rising pension and police costs have been key factors driving up Milwaukee city and county operating spending (excluding capital improvements and debt service) over the past 23 years. In the same period, shared revenue has been cut and other state aid has been stagnant, despite a 65% increase in inflation, while most federal aid and fee revenue is earmarked for specific programs.