Public Policy Forum Blog

City’s smart budget planning continues to pay off

The City of Milwaukee’s past decisions to build up reserves and rethink its health care benefits make its 2014 budget far more palatable than one would expect given a huge spike in pension fund contributions and continued flat revenues.  That’s a key take-away from the Forum’s 2014 city budget brief, which we release this morning.  The brief lays out the details of the mayor’s proposed budget, describing how it balances short-term programmatic needs with efforts to continue structural deficit reduction per its multi-year financial sustainability plan.

Unlike most governments that maintain their own pension funds, Milwaukee typically has not had to finance a large employer contribution, as the value of its pension fund assets typically has exceeded the fund’s liabilities.  That changed following the 2008 stock market plunge, however, and city leaders recognized in 2010 that a $60 million increase in the contribution would be needed in 2013.  They responded by depositing more than $40 million in a pension reserve in the intervening years, and developing a multi-year plan to use the reserve to spread the pain of increased contributions over several years. 

Additionally, the city has realized health care savings beyond its expectations.  Changes adopted in 2012 – several of which were aided by new flexibility granted under Wisconsin Act 10 – ended up saving $37 million, which was $9 million more than originally anticipated.  As a result, the 2014 budget benefits not only from another substantial reduction in baseline health care costs, but also from an increased withdrawal from the tax stabilization fund, which was the recipient of the excess health care savings realized in 2012.

In fact, despite the added burden of heightened annual pension contributions, the city’s budget planning has become so in tune with its short-term financial needs that the general purpose budget actually increases in 2014. In addition to the draws on reserves mentioned above, the city is able to manage a spending increase by also bumping up charges for services, reducing tax levy-supported debt service, and modestly increasing the property tax levy. 

Fiscal challenges remain, however, as an additional $14.8 million of property tax levy will need to be identified within the next three years to accommodate higher pension payments once the pension reserve fund is exhausted.  Moreover, the substantial savings generated recently by major health care changes soon will run their course, with health care costs beginning a more normal rise of 4% annually.  The ability to rely as heavily on the tax stabilization fund also is in question and will depend upon the city’s tenuous ability to continue to generate robust annual surpluses to replenish the fund.

Overall, comfort can be taken in the fact that the city already has cut its structural hole – originally estimated at $65 to $75 million – nearly in half, without substantial service reductions.  This demonstrates the city’s successful efforts to manage through a set of economic circumstances that have generated far more fiscal upheaval in several other cities. 

Stay tuned for an analysis of the 2014 Milwaukee County budget that will be released later this week.

Vanessa Allen