Public pension costs continue to drive up Milwaukee taxes

Wisconsin state legislators passed and Gov. Tony Evers signed Assembly Bill 245 (AB 245), which allows the city and county of Milwaukee to implement a new 2% sales tax. This tax increase is part of a broader proposal in the bill to extend shared revenue payments to financially distressed cities throughout the state. While the taxes and money in Assembly Bill 245 aid local governments in confronting their significant fiscal challenges, cities and counties must use the additional time and resources that the bill gives them to fix the underlying issues driving their rising public pension costs so taxpayers aren’t once again forced to fund them via further tax increases. 

Unfortunately, Assembly Bill 245 does not directly address the primary problems contributing to growing pension-related costs in local governments across the state, including Milwaukee. Truly solving these public pension issues and avoiding additional tax hikes will require emulating the successful public pension reform that has help steer the statewide Wisconsin Retirement System, or WRS, back to a path of affordability and sustainability.    

According to those who worked to pass it, Assembly Bill 245 is crucial to prevent the city and county of Milwaukee from facing bankruptcy and making significant cuts to essential public services like police and fire departments. As per the Wisconsin Policy Forum, a nonpartisan research organization, the city of Milwaukee is expected to experience a $24.2 million budget deficit in 2024, even factoring in $84 million from federal taxpayers via the American Rescue Plan Act (ARPA). This budget deficit is anticipated to grow to $114.3 million by 2025 and $133.7 million by 2028. Similarly, Milwaukee County may have to double or triple its current borrowing limit of approximately $46 million for non-airport projects to address its most pressing costs and financial needs over the next several years.

A Wisconsin Department of Revenue analysis estimates that the city of Milwaukee will generate an additional $193.6 million annually from the newly passed sales tax in AB 245. This type of tax will be new to residents because the city does not currently have a local sales tax. Additionally, Milwaukee County is expected to receive an additional $72.6 million annually through its extra sales tax of 0.375%, adding to its current sales tax rate of 0.5%. Consequently, Milwaukee residents will pay a combined sales tax rate of 7.875% under the new tax structure. Furthermore, under AB 245, Milwaukee will receive an additional $21.75 million from state taxpayers, adding to the existing $217.49 million the city already receives in state aid.

According to the Wisconsin Policy Forum report, the city of Milwaukee’s structural budget deficit arises from three primary issues: increasing public pension costs, limited shared revenue payments, and a state restriction on implementing new revenue sources. 

Since 2000, Milwaukee estimates that its annual shared revenue proceeds, adjusted for inflation, have decreased by $155 million. Additionally, Milwaukee is the only large city among 39 peers in Wisconsin that does not have some form of direct sales tax revenue. On the pension front, the city must contribute $132 million to fund its public pension system next year, up from $71 million in 2023. Although the pension system was 83.4% funded before the 2023 budget adoption cycle, a funding level that exceeds that of many other public pension systems, it still falls short of the mandatory full funding requirement. It is likely to require more funding or major tax hikes to pay for the benefits promised to workers and retirees.

As a result of these challenges, the city of Milwaukee had to resort to budgetary tactics—unleashing property tax dollars and amplifying the ability to allocate additional resources towards pension contributions—to allocate $30 million from the federal ARPA grant to a pension reserve fund. This will only act as a temporary band-aid for the costs because the grant will be exhausted by the end of 2024, and the city will need to nearly double its annual pension contribution from the current amount to continue to make progress on fully funding the pension system.

While AB 245 temporarily relieves the city and county’s fiscal pressures, it does not address the fundamental causes of the budget deficits and unfunded pension liabilities. Specifically, Milwaukee’s rising pension costs have increased unfunded liabilities since the system’s investment losses around the 2007-2009 Great Recession. To ensure the stability of public pension systems and local budgets, Milwaukee must rethink the funding policies and retirement benefits it offers for both current workers and future hires. Luckily, policymakers can emulate the reforms enacted by the Wisconsin Retirement System, widely recognized as one of the most forward-looking and effectively reformed public pension plans of the past few decades.

The cornerstone of the Wisconsin Retirement System’s success with managing runaway costs lies in the flexibility of benefits given to WRS retirees, known as annuity adjustments. All WRS retirees are guaranteed a minimum benefit level that remains inviolable, but the WRS board performs an annual assessment of the five-year averaged investment return and determines the extent to which pension payments can be adjusted. WRS pays a dividend in the form of a benefit increase only if the pension fund’s investment return target is met. This means that state employers and retirement system members share surprise costs caused by investment returns coming in below expectations—an issue that has plagued nearly all public pensions for over a decade.

The retirement benefits offered to Milwaukee employees include an automatic cost-of-living adjustment (COLA) to retirees, irrespective of investment performance. This approach starkly contrasts the policies used by WRS and has generated significant negative impacts for local taxpayers. 

Two critical challenges need to be addressed to implement the proposed pension reforms. First, per the June 2021 report of the “Mayor’s Task Force on the City of Milwaukee’s Pension System,” Milwaukee needs to adopt a more rapid amortization of unfunded pension liabilities, reducing the current practice of funding benefits over 25 years down to 10 years. As a result, the city would require an additional $226 million in accelerated payments per actuarial standards. This move would reduce the interest taxpayers must pay on the pension debt, which is prohibitively expensive in the long term.

Second, state law prohibits the city from making unilateral changes to the pension benefits for city employees hired before Nov. 3, 2011, or for those with the right to collectively bargain. Any pension benefit adjustments for those Milwaukee employees would require arduous negotiations and potential modifications to state law or the city charter.

Furthermore, the city should consider directing future hires to the risk-reduced state plan rather than bringing more members into a public pension plan that continues to generate unexpected costs. This approach would help spare city budgets from so many runaway pension costs in the future.

The newly passed state bill provides temporary relief to city governments via a tax increase. However, Milwaukee needs to urgently tackle the mounting pension expenses burdening the city’s budget. To accomplish this, WRS presents a viable blueprint for overhauling Milwaukee’s retirement system. 

The Wisconsin Retirement System properly aligns a retirement plan’s financial risks and costs to strike a more appropriate and modern balance between taxpayers and public employees, which should be the template for Milwaukee policymakers.