This is the first in a two-part series that will explore the impact of COVID-19 on Wisconsin municipalities. This articles focuses on cities and villages, while a subsequent article will examine Wisconsin counties.
Wisconsin municipalities are bracing for the financial impact of COVID-19. While Wisconsin cities and villages benefit from a fiscal framework that is relatively stable, they will experience budgetary pressures as a result of COVID-19. Savvy municipalities are starting to plan for the post-COVID world now, so that the impact can be effectively managed for tomorrow.
The good news is that the primary sources of revenue for Wisconsin cities and villages – state aid and property tax – will be relatively stable over the near-term. Other sources of revenue, such as charges for services and room tax, are more volatile and could pose challenges for municipalities with a diverse revenue base.
COVID-19: the Wisconsin municipal fiscal framework
Property taxes: Property taxes, tax increments and payments in lieu of taxes represent 56% of revenues for Wisconsin cities and villages. Therefore, while property values falling during a downturn is a concern, the budgetary impact will not be felt immediately. Reductions in property values will not be reflected in budgets until 2022. At that point, policymakers could face difficult decisions about offsetting declines in property values by raising property tax rates.
Delinquent property tax payments could pose an immediate cash flow concern for some Wisconsin municipalities. This concern is partially mitigated by the process in Wisconsin whereby most municipalities turn over their delinquencies on real property to their county government to collect, and are paid in full for unpaid taxes. Counties, however, do not settle for all items placed on the tax bills.
State aid: State aid represents an important source of revenue for cities and villages. State aid levels have been set through June 30, 2021. The possibility exists that state aid could be reduced in future state budgets.
Charges for services: Wisconsin municipalities generate revenue for general government operations and for proprietary funds through a variety of charges and fees. Examples include charges for solid waste collection, parking, sewage service and transit. Some of these services, such as charges related to bus and transit service, will be heavily impacted by the COVID-19 crisis.
Room tax: The room tax is one of very few taxing options for municipalities in Wisconsin. It is generally limited to a maximum rate of 8%, and the proceeds must largely go to tourism promotion. Tax collections for hotel stays are clearly very vulnerable to the disruption caused by COVID-19.
COVID-19: the Wisconsin municipal response
Municipalities need to start planning for the impact of COVID-19 and the economic fallout. While each municipality is part of the Wisconsin fiscal framework, each city or village is also unique and will experience this crisis differently.
Proactive municipalities are reviewing budgets, cash flow projections and mid- to long-term financial plans. Cities and villages need to determine where they are vulnerable and what tools they have available to address their vulnerabilities.
Scenario planning: Many municipalities are finding that scenario-planning exercises are very valuable in this uncertain time. Scenario analysis can stress test the impacts to service levels and tax rates under a variety of possible circumstance that take into account different assumptions related to property values and tax collections.
Short-term borrowing: In Wisconsin, municipalities have a variety of short-term borrowing options that can be used to bridge delays in revenue. Tax and revenue anticipation notes are one tool that Wisconsin municipalities may issue in anticipation of the receipt of federal or state aid, taxes levied or other deferred payments. Such obligations must be issued in the same fiscal year the municipality is entitled to the receipts. The amount of the tax or revenue anticipation notes may not exceed 60% of the municipality’s actual and anticipated receipts in the fiscal year. These notes must be repaid no later than 18 months after the first day of the fiscal year. Federal arbitrage laws limit the term of such notes to 13 months in most circumstances.
Economic development strategy: Municipalities need to be ready to respond to COVID-19 with nimble, creative and aggressive economic development strategies. Communities should wisely use every available economic development tool to attract capital, maintain financial viability, put people back to work and help shape a post-COVID economic future. This response should include an assessment of the damage, a plan to maximize state and federal support, and a proactive strategy for business retention, expansion and attraction.
While the COVID-19 pandemic is a testing our country and state, together Wisconsin municipalities and their people will emerge from this crisis stronger. On, Wisconsin!
For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.