The cruel world of local government finance

In the weeks since release of the governor's proposed 2011-13 state budget, much has been spoken and written about the potential impacts of cuts in state aids on local government budgets and services. Yet, while much of the discussion has focused on high-profile cuts to shared revenues, municipal recycling grants and general transportation aids, buried within the budget are dozens of less-publicized, complicated provisions that also may have far-reaching impacts.

One of those relatively obscure provisions is related to the new property tax levy limit on municipal and county governments. The limit itself has received considerable attention, as instead of having their annual allowable property tax growth capped at no lower than 3%, counties and municipalities would be capped at the greater of 0% or the percentage growth in equalized value resulting from new construction. Because the change in new construction is projected to be less than 1% in many counties and municipalities, that's a significant reduction.

But perhaps equally noteworthy is a provision that would require counties and municipalities to decrease their allowable levy in any year in which they experience a decrease in debt service on debt issued before July 1, 2005, by an amount equal to the decrease. In other words, if a local government is fortunate enough to experience a lower overall debt service payment from one year to the next, then instead of having the discretion to do as it pleases with those savings, it may be required to pass the savings back to its property taxpayers.

Without taking up the issue of whether the new provision is good or bad for those taxpayers, it does throw a curveball at those local governments that have consciously tried to keep a lid on their debt issuances as a strategy for obtaining long-term operating budget relief.

One such government is Milwaukee County. Despite the county's overall budget woes (as documented in several reports by the Public Policy Forum and others), one of its true fiscal success stories has been in the area of debt management. Just last month, for example, the Standard & Poor's ratings agency praised the county for its "moderate debt burden with rapid debt amortization."

As we explained in our recent Milwaukee County Executive Election Brief, after it decided to refinance a major portion of its debt in 2003, the county made a concerted and deliberate effort to keep a lid on annual borrowing. In fact, its discipline in adhering to self-imposed caps on general obligation bonding, while arguably contributing to its vast backlog of infrastructure needs, has positioned the county to benefit from a significant decrease in annual debt service payments by 2015. In that year, according to the county's 2011 budget, the annual debt service payment could drop from $63 million to $47 million.

Until recently, county fiscal officials viewed the funds freed up from potential reduced debt payments as a critical piece of a long-term approach to dissolving the county's structural deficit. In fact, given the painful nature of all other potential strategies, this was one of the few bright spots in the county's long-term fiscal picture.

If the new requirement that local governments reduce their levies commensurate with reductions in annual debt service payments is adopted, however, then one of the only promising tools in Milwaukee County's limited deficit-reduction toolbox will be eliminated. Such is the world of local government finance, where even the best laid plans can be wiped out by higher levels of government at a moment's notice.