Wisconsin lawmakers signed off on legislation that raises local government aid and empowers Milwaukee and Milwaukee County to enact a sales tax hike after months of negotiations and dire warnings over the city’s looming insolvency.

Lawmakers gave final approval to the legislation late Wednesday and Gov. Tony Evers is expected to sign it. As part of an agreement struck last week between Evers, a Democrat, and the legislature’s GOP leaders, private schools, independent charters and public schools will receive more money under another bill that lawmakers also approved Wednesday. The budget is expected to include an additional $1 billion for education.

“It’s my job as governor to always work to do the right thing when it matters most,” Evers said in a statement. “We’re securing over $1 billion for our kids and our schools to improve reading and kids’ mental health while making historic investments in our communities. This is a win for Wisconsin.”

The local government funding bill siphons off 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.

The legislation also 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. If approved by the local governing bodies, Milwaukee could raise nearly $180 million more annually and the county $80 million, according to estimates.

The legislation requires that Milwaukee — which has been stung by a series of rating downgrades over its budgetary pressures, rising pension contributions and use of reserves — put the new sales tax revenue toward its pension obligations with a portion also going toward public safety. 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.

Evers included a hike in shared local government aid in his budget proposal earlier this year but the GOP said they would craft their own proposal.

After months of contentious talks, Evers and the GOP reached a tentative agreement last week that paved the way for passage of the legislation, despite misgivings by some local officials over GOP-backed policy mandates, and opposition from some lawmakers who didn’t want the sales tax and shared aid issues combined.

Backers on both sides promoted it as a compromise, but it still had critics.

“It is extremely disappointing that needed reforms to the state shared revenue formula have been held hostage to backroom deals that ostensibly bail out Milwaukee after decades of fiscal mismanagement,” state Sen. Andre Jacque, R-De Pere, said in a statement. “In the end, that was too high a price to pay for me to support this legislation.”

Democratic lawmakers had their own complaints in measures imposed on local governments such as a ban on holding advisory referendum with the exception of certain issues, restrictions on spending tax dollars on issues involving diversity, equity and inclusion initiatives, as well as restrictions on the powers of local public health officials to close businesses during a public health emergency.

But those that voted for the bill said the need to raise local government aid and help Milwaukee outweighed their objections.  

Local votes needed
Milwaukee Mayor Cavalier Johnson had warned lawmakers last month of deep budgetary strains looming in 2025 that would require draconian public safety cuts which raised the specter of bankruptcy although state approval would needed for such a step.

“We have reached an important milestone in the work to resolve Milwaukee’s fiscal challenges. Today’s legislative votes have empowered the city of Milwaukee to overcome financial problems that were decades in the making,” Johnson said.

Johnson will still need council approval and some members have said the GOP mandates are too much to swallow. “I agree with council members who object to certain provisions in this bill. Regrettably, the infringement on local control is now part of this law irrespective of a Council vote on a sales tax,” Johnson said. “Milwaukee will soon have the opportunity to enact a local sales tax and the ability to resolve its own fiscal challenges, just as its peer cities around the country have. This is a major achievement.”

Fitch Ratings last month cut the city’s ratings by two notches to BBB-plus from A over its strains and warned that the proposed new funding mechanisms pending before the legislature might fall short of solving the city’s fiscal woes.

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.

The city’s 2023 budget covers a jump to more than $130 million in pension contributions that’s nearly doubled the prior five-year payment of about $70 million annually. The city sets the pension funding rate every five years. S&P Global Ratings recently affirmed the city’s A-minus rating and negative outlook.

The county too has warned of rising costs and growing structural imbalances that could drive deep cuts in the coming years without new revenue.

“While our desire for autonomy remains steadfast, it is vital that Milwaukee County, as an arm of the state, acknowledges the fiscal realities that we must confront,” County Executive David Crowley and Chairwoman Marcel Nicholson said in a statement also pressing the need for local passage. “The looming threat puts at risk critical services. Reaching a fiscal cliff in a few short years would also mean Milwaukee County will only be able to make the bare-minimum investments into the entire public safety continuum which will delay justice, make communities less safe, and produce worse outcomes for all residents.”