Enormous fiscal cliff on horizon
Using billions of emergency pandemic bill dollars to plug gaping holes in their budgets, local governments across Wisconsin and the country are setting themselves up to ask for tax increases or slash services as basic as police and fire protection when the federal funding runs out.
Just how steep this fiscal cliff will be is only beginning to be realized. Early research indicates that at least half of the more than $350 billion in State and Local Fiscal Recovery Funds (SLFRF) allocated in the American Rescue Plan Act is eligible to be used to provide government services, award salary increases or even pay down employee pension debt.
A review of the few progress reports available through the U.S. Department of the Treasury shows that six of the seven Wisconsin cities and counties reporting, including Milwaukee, made SLFRF money available for use in propping up their budgets, more than $700 million of it.
Milwaukee expects to use $245 million of its $394 million SLFRF grant to close gaps in the 2022-24 budgets. After that, without help from the state, city Budget and Management Director Nik Kovac told the Badger Institute, the city will have little choice but to lay off perhaps hundreds of employees “across all departments.”
“This fiscal cliff, precipice, whatever you want to call it, we want to put it front and center,” Kovac said in an interview. “Using ARPA funds for this purpose is not a best practice, but the alternative is worse.”
In an issue paper released in April, Beverly Bunch, a public management and policy professor at the University of Illinois-Springfield, said poor documentation of the ground-level spending was obscuring what could be a significant problem for local governments.
“The fiscal cliff is real,” Bunch told the Badger Institute. “State officials need to be concerned about it.”
Local governments are coming to this pass, as is often the case with big government programs, because of the good intentions of the benefactors. As the Badger Institute reported more than a year ago, communities that had never seen sums like those from the $1.9 trillion Rescue Plan Act were having a difficult time trying to spend the money within the federal guidelines. Many were forced to spend valuable ARPA funding just to administer their ARPA funding.
Since Congress passed ARPA on March 11, 2021, Wisconsin governments of all sizes have managed to spend just $813 million, or 32%, of the $2.53 billion allocated to them, according to a document provided to the Badger Institute by the state Department of Administration. The state is due to receive another $2.5 billion, which must be spent by the end of 2026.
Just months into the allocation of this federal windfall, the U.S. Treasury Department quietly changed the spending rules for states, counties and cities. Governments could appeal to ARPA officials for revenue replacement, or an estimate of revenue lost because of the pandemic.
The wrinkle in revenue replacement was that counties and cities did not have to document their revenue loss. The Treasury Department’s new and relaxed formula for claiming lost revenue allowed governments large and small to divert huge portions of their SLFRF allocations away from the programs prescribed in ARPA guidelines and into the day-to-day operation of their governments.
The SLFRF guidelines already allowed for spending that was tied tenuously at best to emergency COVID relief. Gov. Tony Evers’ administration, for example, committed $100 million to a statewide broadband expansion program that will end up costing $3,225 for each of the roughly 31,000 residential and business locations to be served.
Revenue replacement now allows huge sums of SLFRF money to be tucked into local budgets, an accountability and transparency problem that concerns Bunch.
“Allowing ARPA money to be added to general funds concerns me because it’s harder to find and it loses its character as a federal emergency measure,” she said.
Of the more than 1,900 government entities in Wisconsin that received at least some ARPA money, the Treasury Department has just seven progress reports on its website.
They include a state performance report dated July 31 and reports for the first part of 2022 for the cities of Milwaukee and Madison and for Milwaukee, Dane, Brown and Waukesha counties.
A review of those reports offers a glimpse into how local governments are now relying on revenue replacement to augment their budgets.
The City of Milwaukee, for example, added $20.8 million to the Fire Department’s Emergency Response program and another $6.7 million for emergency medical services training in 2022. The city hired 20 new sanitation workers as part of a $2.3 million Clean City program.
In its report, Milwaukee County says it committed $115.7 million in revenue replacement funds in 2022 to provide government services. There is no outline of what those services are or will be in the report.
Dane County committed $21.2 million to maintain government services. Its seven-page report does not mention what the county intends to do in 2023 and beyond. The phrase “revenue replacement” does not appear in the report.
Of the $47.2 million in SLFRF funding allocated to Madison, the city chose to use $24.4 million “on wages for emergency workers, as well as to balance the general fund budget and avoid the use of fund balance in 2022,” according to its report.
The reports, however, also show cities like Madison and Milwaukee using SLFRF funds outside of revenue replacement for the creation of new programs and the hiring of employees to staff them — positions that will either have to be supported with local tax money or ended when the federal funding is exhausted.
Far from one-time expenses, Madison in the past year committed $3.5 million in SLFRF funds for unsheltered homeless support, $2 million in seed money for a homeless services project and $2 million for a youth housing project.
David Schmiedicke, Madison’s finance director, acknowledged that the city council will have decisions to make in 2025 and 2026. “All of the ARPA funding was recognized as one-time,” Schmiedicke told the Badger Institute. “Continuation of any ARPA-funded programs will be considered on a case-by-case basis in future budgets.”
As welcome as the ARPA funding has been, the depth of the coming fiscal cliff will bring into sharp relief longstanding fiscal troubles, particularly for the more populous cities and counties in the state, Schmiedicke said.
“Since 2012, the city has faced structural deficits in funding for current service levels compared with anticipated revenues under strict state limits on allowable growth in property taxes, declining state aid, and state limits on general revenue options for Wisconsin cities,” he said.
ARPA has temporarily changed the arc of local government debt, which already reached a record $11 billion at the end of 2020, when Wisconsin was fully engaged in combating COVID-19.
Local government debt in that year nearly doubled over the previous year, according to a report released at the end of November by the Wisconsin Policy Forum. Of that debt, $1.13 billion is Milwaukee’s alone, and more than a quarter of the debt is shared by the state’s five biggest cities, the report says.
But the fastest growth in debt, according to the report, occurred in the state’s smaller communities, in whose budgets SLFRF funding has had an outsized impact. As the Badger Institute reported over the summer, despite being flush with ARPA money, some cities are asking their voters to approve property tax increases.
Kovac isn’t waiting for Milwaukee to reach the cliff. In a memo to the city’s Finance and Personnel Committee in late October, he warned that SLFRF funding would be gone by the end of 2024, leaving shortfalls of at least $100 million in the 2025 and 2026 budget projections.
The city poured $68 million in revenue replacement money into its general fund freeing up $40 million to add to its pension reserve fund in 2022, Kovac said.
“Unless new revenue at that scale is acquired, significant budget cuts — forcing hundreds of layoffs across all departments — will be inevitable,” Kovac said in the memo.
Kovac’s warning was directed at state officials. No local government in the state has been as buffeted over the last decade by state aid cuts and curbs on property tax increases as Milwaukee, he says.
While the State of Wisconsin took advantage of Treasury’s revenue replacement plan to the tune of nearly $1.5 billion, the fiscal outlook for the state has never been better.
A Wisconsin Policy Forum report released this week called a projected revenue surplus of $6.8 billion over the July 2023 to June 2025 budget cycle “astounding.”
Kovac said he’s optimistic the Legislature will see fit to channel some of that surplus to Milwaukee for three reasons: Mayor Cavalier Johnson has established better relationships with Republican state legislators than his predecessor, Tom Barrett; the Republican majority in the Assembly and Senate would not want to see government services cut in 2024 when the city is hosting the Republican National Convention; and no state government body would countenance deep cuts in police and fire protection for the state’s biggest city.
“We’ve been very honest about it from Day One,” Kovac said. “We don’t want to do it, but what other choice will we have?”
Mark Lisheron is the managing editor of the Badger Institute’s Diggings magazine. Permission to reprint is granted as long as the author and Badger Institute are properly cited.
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