Public Policy Forum Blog

Some perspective on surpluses

The City of Milwaukee's recent announcement of a $23 million budget surplus for 2009 - following closely on the heels of Milwaukee County's announcement of an $8.9 million surplus - has engendered the expected spin-doctoring from the gubernatorial campaigns of the mayor and county executive, as well as their legions of supporters and detractors.

Last year, the Public Policy Forum conducted assessments of the fiscal condition of both city and county government using a set of fiscal indicators developed by the International City/County Management Association. Based on those assessments, we offer the following points of perspective:

  1. The fact that both governments were able to generate healthy budget surpluses in the midst of an historic economic downturn is a tribute to their conservative approaches to monitoring and ultimately balancing their budgets. While logical questions are being raised regarding the necessity of some of the mid-year actions taken by each government to control spending, it's important to remember that fiscal forecasting is not an exact science, and that in a $1.3 billion budget, the margin of error between a small deficit and a small surplus is minuscule. Given that reality, it seems reasonable for our public sector fiscal officers and chief executives to err on the side of caution.
  2. It's a tad misleading to characterize the year-end figures cited by the city and county as "surpluses" given that both build their annual budgets with an expectation that revenues will slightly exceed expenditures. In the case of the county, the 2010 budget contains the $4.1 million surplus from 2008, so anything less than a $4.1 million surplus in 2009 would have created a deficit in that revenue category for the next budget. In the case of the city, a significant sum is taken from the Tax Stabilization Fund (TSF) in each annual budget to hold down property taxes (in 2010, that amount is $13 million). Consequently, failure in any given year to achieve a sufficient surplus to replenish the TSF will erode its value. There is no hard and fast rule that the two governments must achieve surpluses to equal that of the previous year or the TSF withdrawal, but sound budget practice (and the watchful eye of bond ratings agencies) certainly encourages them to do so. In that respect, achieving a "surplus" is a concrete policy objective.
  3. While fiscal leaders in both governments should be commended for their budget management skills in 2009, their long-term structural challenges remain very much alive. In some important respects, such as implementation of wage and benefit reductions and new administrative efficiencies, recent actions by both governments have made dents in their structural problems. Both governments also will be helped significantly in the near term by recent impressive investment returns in their respective pension funds. Nevertheless, both continue to face immense challenges with respect to old and deteriorating infrastructure; retiree health care costs that are expected to increase much faster than inflation; the need to replace stimulus dollars that helped prop up budgets in 2010; and the prospect of further cuts in the already stagnant state revenue streams upon which each largely depends.

You know it's election season when promising fiscal news is greeted with skepticism by some, and derision by others. From the Forum's objective perspective, it is appropriate to applaud this good news and give credit where it is due, but not lose sight of the deep long-term financial challenges that continue to face all levels of government and that, unfortunately, show little sign of abating.

Author: 
Rob Henken