Milwaukee wins new sales tax for pensions, public safety

Milwaukee Mayor Cavalier Johnson Friday signed into law a 2% municipal sales tax rate, marking the end of a long-fought battle to shore up the city’s ailing finances, which have been hit by rising pension costs.

“We’ve accomplished something huge, something major, something extraordinary for our city,” Johnson, surrounded by local and state officials in which he used a dozen pens to sign the legislation, said during a press conference.

“So many people worked on this, and I wanted to make sure that everybody got a pen that was used to sign the file,” he told local reporters.

The measure comes after several months of ratings downgrades and dire warnings over the city’s looming insolvency. The Milwaukee Common Council approved the legislation last week by a vote of 12-3.

“The word that comes to mind is ‘relief,'” Common Council President José G. Pérez told local reporters. “Relief that, for the first time in years, the city can prepare a budget without a dark shadow over it.”

Milwaukee has long clamored for more state help on the revenue front as state revenue-sharing levels have been stagnant and state law limits local governments’ ability to raise most revenues. Milwaukee relies on state aid for about 40% of its general fund revenue, according to Fitch Ratings. Property taxes account for another 32%.

Unlike other similar-sized cities around the country, Milwaukee lacked the authority to collect a municipal sales tax until now, noted the Wisconsin Policy Forum.

An infusion of nearly $400 million of American Rescue Plan Act funds helped temporarily stave off immediate cuts.

Facing budgetary pressures, rising pension contributions and the use of reserves, Milwaukee has been hit by a series of ratings downgrades.

In May, Johnson warned lawmakers of deep budgetary strains looming in 2025 that would require draconian public safety cuts. This raised the specter of bankruptcy, although state approval would be needed for such a step.

After months of bipartisan negotiations between Gov. Tony Evers, state, and local officials, Wisconsin state lawmakers in June agreed to raise the amount of local government aid it sends to the city and crafted the bill allowing the city and Milwaukee County — which faces its own fiscal problems — to levy the sales tax.

On Monday, a key county committee advanced its own 0.4% sales tax increase. The full board will take it up later this month.

The 2% sales tax and state aid legislation requires the city to put the new revenue toward its pension obligations with a portion also going toward public safety, reflecting the city’s most urgent fiscal pressures of rising pension costs and insufficient public safety funding. Public safety accounts for 43% of its general fund spending.

The county must use the revenue for its pension contributions, to pay down pension obligation bonds, and unfunded liabilities. New employees are moved to the state retirement system.

The local government funding bill siphons 20% of the state’s 5% sales tax and directs it to its local government shared revenue program to raise current allocations that have been stagnant for years, pressuring governments that operate under property tax levy caps.

It gives the Milwaukee Common Council and the Milwaukee County Board the power to approve sales tax hikes of 2% and 0.4%, respectively, with a two-thirds majority vote. The legislation dropped previous language requiring a public vote.

The sales tax goes into effect in January 2024. The city’s current sales tax is 5.5%, which includes a 5% statewide sales tax and a 0.5% county tax. The new rate will lift that to 7.5%. The rate would go to 7.9% if the county board votes on July 27 to raise its sales tax by the newly allowable 0.4%.

The state Department of Revenue estimates the new rate will generate $193.6 million for the city in its first year. If approved, the 0.4% county tax would generate an additional $82.2 million in 2024.

The city’s Comptroller Aycha Sawa told local reporters the city is still crunching annual estimates. “We’re still working on it and we’re still analyzing [the state’s] methodology. We don’t have a number yet,” she said.

In approving the sales tax, the Republican-led state Legislature included a series of GOP policies — such as cutting spending on diversity, equity and inclusion efforts — that the city is expected to try to oppose. The state is also requiring Milwaukee to maintain police and fire staffing levels or face the loss of state aid.

The city’s 2023 budget covers a jump to more than $130 million in pension contributions that’s nearly double the prior five-year payment of about $70 million annually. The city sets the pension funding rate every five years.

The city is waiting for an analysis from the Wisconsin Policy Forum and a study from Ernst & Young to help craft its 2024 budget, which will be adopted in November.

Fitch Ratings last month cut the city’s ratings by two notches to BBB-plus from A over its strains and warned the then-proposed new funding mechanisms might fall short of solving the city’s fiscal woes and that the city would need to make cuts in 2024 even if it passes.

The rating and negative outlook “reflects Fitch’s belief that the recently proposed state legislation boosting local funding may not be sufficient to minimize the budgetary imbalances in the near term, forcing the city to make meaningful cuts to public safety service delivery to close a sizable budget gap estimated at approximately 21% of spending,” Fitch said.

Fitch in November, ahead of a borrowing, dropped the rating two notches to A from AA-minus and put a negative outlook on the rating.

S&P Global Ratings, after cutting the city by one notch in November, recently affirmed the A-minus rating and negative outlook.

In September, Moody’s Investors Service cut the city’s general obligation rating on $1.2 billion of debt to A3 from A2. The city’s sewer bond rating fell one notch A2 from A1 as a result, due to the strong governance connection between the city and sewer system and the commingling of cash. The outlook on both is negative.