Important: City Operating Budget Challenges Ahead, Presentation at 2/13 Council Meeting

Note: City Finance Department staff have created a new webpage on the 2025 Budget Outlook on the City Budget that hosts all of this information as well as recorded presentations with detailed explanations. For this post I borrowed details and language heavily from that content. Many thanks to Finance staff who worked hard in a relatively short period of time to put all of this together.

Background

At the request of several alders (including myself) and the Mayor, City Finance Department Director David Schmiedicke and his team have been sharing weekly presentations and information about the 2025 City Operating Budget conditions. The City Operating Budget’s projected 2025 structural deficit (cost to continue current level of service minus the revenue the City is on track to collect in 2025) is expected to be significant: a $27 million deficit. Property taxes, local charges, and state aid revenue to the City grew much more slowly than the cost to provide City services over the last few years. This didn’t impact budgets too much while the City had access to federal pandemic-era funding, but that money is off the table after 2024.

As a reminder, the property tax levy-limited portion of the Operating Budget funds staff salaries and benefits, supplies, and contracted services – not debt service (which isn’t subject to the State’s tax levy limit) or Capital Budget expenses like buildings, vehicles, or infrastructure. Cutting Capital Budget spending will lower tax bills, which is a good thing, but that strategy will not help close the Operating Budget’s projected structural deficit. The City must pass a balanced budget, so this large of a gap will require significant cuts to City services and layoffs/salary and benefit cuts, significant new revenue in the form of higher charges or property taxes, or some combination of both. 

Closing the Operating Budget Deficit with Cuts

For context, the $27 million deficit is also the amount of money that the City Streets Division (think: snow plowing) received in 2024. Of the total Operating Budget, $338 million (excludes Debt Service which does not count toward the State’s levy limit), a $27 million cut is just less than the cost of all central administrative services ($30 million): Assessor, City Attorney, Civil Rights, City Clerk, Finance, HR, IT. $27 million represents 8% of

A new State law imposes a “maintenance of effort” requirement on municipalities that requires funding and staffing for police and fire be maintained at least at the same level as, or greater than, the previous year. If these maintenance of effort requirements are not met, State “shared revenues” allocated to Madison will be cut by 15% as a penalty. Excluding the public safety agencies per this new maintenance of effort State law, a $27 million cut to the rest of the Operating Budget ($177 million) corresponds to a 15% cut to the remaining City agencies. That means Parks, Libraries, Streets Division/snow plowing, Violence Prevention, City Clerk, Traffic Engineering, City Engineering, etc.

Without salary/benefit cuts, a $27 million cut to positions represents a mass layoff of about 270 positions (10% of total, or 20% if excluding Police and Fire). We need to consider the fact that the layoff process is defined by collective bargaining agreements and the City’s employee handbook. Also remember that the City must pay the unemployment insurance costs of laid-off employees. This option would also directly, and significantly, limit how much project or program work that City departments can accomplish in a year. Without staff layoffs, $27 million cut to salaries represents a 9% cut to staff salaries and benefits if Police and Fire are included. If Police and Fire are excluded from a salary cut per the State’s new “maintenance of effort” law, this represents a 27% cut to all other staff salaries and benefits. We can reasonably expect resulting position vacancies to limit how many projects and programs the City can support on an annual basis.

Closing the Operating Budget Deficit with Revenues

Property Tax

Unlike most Cities of our size outside of Wisconsin, Madison is very reliant on property taxes to fund its services, with over 70% of its revenues from this source. This reliance on property taxes is primarily due to the restrictions the Wisconsin Legislature placed on cities in 2011, along with Wisconsin’s approach of collecting sales and income taxes on a statewide basis rather than at the local level.  

Increasing property taxes above state law limits requires approval by the voters at a referendum, which must be approved by a majority vote of the Common Council. The increase on the referendum ballot must be a fixed dollar amount, not a percentage of the levy each year. With state law only allowing a fixed dollar amount on a property tax referendum, the structural deficit is only addressed for a short period of time under this option. In other words, a voter-approved property tax increase shrinks as a share of the total budget in each subsequent year after a referendum is approved.  In 2022, over 30 municipalities proposed referenda to increase local property taxes, with the vast majority (29) of those passing.

Raising $27 million (the size of the 2025 budget gap) from additional property taxes would add $284 to the annual tax bill of the average value home – or about a 9% increase above the City levy approved for the 2024 budget, which is equivalent to about an additional 3.7% on the total tax bill. In considering how this tax rate would compare to neighboring communities, using last year’s numbers, it would not have dramatically changed Madison’s tax rate ranking compared to other communities in Dane County. Sun Prairie and Waunakee would still be higher the Madison, and Fitchburg, Verona and Middleton would all remain lower.

Local Charges and Fees

Madison collects about $55 million in local revenues. These include charges for services (e.g., ambulance fees), licenses and permits (e.g., building permits), fines and forfeitures (e.g., parking violations) and other revenues (e.g., room taxes and investment earnings). Each of these options would have an impact on City residents and each raises serious equity concerns for working families and fixed-income households.

We could raise the Room Tax (local tax on hotel stays), but only 30% of room tax revenues can be used to support General Fund services; the remainder must be used for tourism-related activities, as defined under state law. We could raise the Vehicle Registration Fee (“wheel tax”), currently $40 per registration. A $10 increase in the wheel tax would raise about $1.7 million annually that could be used to pay for transportation-related services that are currently supported by General Fund revenues. We could create new “special charges” to pay the cost of specific services for which a “broad-based” public benefit can be identified. The City currently has two special charges: urban forestry and resource recovery (recycling), paid on the Municipal Services Bill. Other possible options for new special charges include transportation (e.g., traffic engineering), libraries, and parks. Each $1 per month per residence raises about $1 million in revenue annually. Special charges for certain activities (garbage collection, snow removal, fire protection, street sweeping and storm water management) do not increase revenue to the City due to requirements under the state levy limit law. Special charges require a study to determine and provide evidence for the public benefit, along with a methodology for allocating the cost of the service. 

State Aid

This category of revenue is under the State’s control, not the City’s. State aid to the City totaled $45.6 million in 2024 (excluding state transit aid, which can only be used to support Metro Transit), or about 11% of our total budget. Under Wisconsin law, the state collects income and sales taxes and “shares” those revenues with local governments, rather than allowing cities to levy their own sales and income taxes. These “shared revenues” were reduced significantly by State Legislatures since 2003. In the most recent state budget, shared revenue was increased by $275 million and the allocation formula was changed. However, under this new formula in the latest State budget, Madison received an increase of less than 1% of our entire budget. Madison received the lowest per capita increase of any municipality in the state.

Equity and Fairness Concerns with These Revenue Options

• Ways that user fees and charges are less equitable / more regressive than property taxes: User fees and charges are a flat dollar amount no matter the situation of the person paying – thus, higher income groups pay a smaller share of their income for the service compared to low- and moderate-income groups. By contrast, property taxes are allocated through a percentage rate – therefore, higher value properties pay more taxes than lower value properties. Additionally, user fees and charges can be levied on all property regardless of tax status; whereas government and non-profit owned property do not pay property taxes. In contrast to property taxes, user fees and charges cannot be deducted on federal income taxes.
• Ways that property taxes are less equitable / more regressive than user fees and charges: Relief available for payers also varies between property taxes and user fees and charges. Under the Wisconsin Constitution, taxes must be uniform. For property taxes, this means that all property, with certain limited exceptions, must be taxed at the same percentage rate. A residence has the same tax rate as a business; a large property with a significant amount of improvements has the same tax rate as a small property with proportionally fewer improvements, etc. In addition, no direct relief to any specific group of taxpayers is allowed on the property tax bill. In other words, the City cannot create a program to directly reduce the taxes of certain property owners (e.g., lower income, seniors, etc.). There are programs at the state level that provide targeted property tax relief through the state’s income tax (e.g., the Homestead Tax Credit).

Next Steps

The February 13th Common Council meeting agenda includes a presentation item where alders can ask questions and provide input (at the March 5th meeting) on which available strategies we want to explore to close the $27 million gap in order to balance the 2025 Operating Budget. That discussion will determine how staff prepare specific for cutting services if directed by Council, preparing the necessary processes to raise or organize new local charges, or preparing a resolution that triggers a referendum on the ballot where voters can decide whether to raise the property tax levy above the current limit. Considering how severely an all-cuts approach would hit City services, and how steep the revenue-only increases would be, I expect we’ll need to use a combined approach. As always, if you have input or questions, send me an email: district3@cityofmadison.com

This is a lot of information and it’s a serious situation that will impact the quality of City services and/or the cost to live in Madison. I highly recommend that those interested check out the Finance Department’s new webpage with presentation recordings and many more details than my summary here.