September 21, 2023 | By MacIver Staff
Policy Issues
Accountable Government State Budget

Good (Responsible) Budgeting Options For Local Governments

How can conservative local officials be responsible with the huge increases in state aid?

As Locals Plan Budgets, They Have Options Besides Growing Government With Huge Windfall From State

State and local governments in Wisconsin received over $7 billion in pandemic aid between 2020-2022, not counting the $2.9 billion that went to K12 school districts. For context, $10 billion is about half of the state’s annual general fund budget, and it amounts to over $4,000 for every household in Wisconsin.

The unprecedented – ‘historic’ as the kids say these days – deluge of what elected officials saw as free money spurred a government spending frenzy. These monies obviously surpassed needs resulting in new programs and wasteful spending; we’ve covered some of them here, here, and here.

While the pandemic aid has ended (though it’s not all spent yet) the spigot has remained on courtesy of state taxpayers and the huge surplus. The state budget this year increased spending by more than 11% and included record-breaking increases of revenue sent to local units of government. State aid to local governments increased by 37%, and that’s on top of levy increases of 66% over the past decade.

Fiscal conservatives have long argued that the problem isn’t that government doesn’t have enough money to fund necessary functions but that government has gone too far afield, spending more and more on wants not needs. But this year, the arguments for bigger government and higher spending got a strong foothold in the legislature. The debates were not about whether new spending was needed, but how high the spending increases should be.

As a result, hundreds of millions more tax dollars will be flowing into local government coffers every year. Most of these governments will spend the new money and ask for more. The groundwork has already been laid by their lobbyists, who continue with a mantra that the new funds were only a single, small step in the right direction, a stopgap measure.

But other local officials have quietly expressed concerns about the windfall, saying it will be that much harder to stop unnecessary, wasteful, government-exploding spending in the face of such bounty.

As we head into local government budget development season, there are a number of ways that conservative-minded local elected officials might try to refocus budgeting on providing needed services, and not simply using the new money to grow government. These options would include paying down debt, saving for a rainy day, investing funds for long-range capital projects, and tax cuts.

Pay Down Debt

One of the arguments local governments made to state lawmakers was that they were increasingly using debt – borrowing money – to balance their budgets. Local debt increased more than 40% between 2000 and 2020 and debt service, the term for government payments on debt, increased 87% between 2021 and 2021.

What isn’t often mentioned about local government borrowing is that debt service payments are outside levy limits, so local officials can raise taxes as much as needed for those payments, making borrowing an effective end-run to levy limits, especially with rapidly rising property values allowing higher levels of borrowing. Nearly a third of Milwaukee’s levy goes toward debt repayments.

Obviously, interest increases the cost of any project that a government borrows to finance, so paying down debt saves tax dollars. To the extent that any local government relied excessively on borrowing to finance their general operations, paying off some or all of that debt should be a top priority.

Local officials who are looking for fiscally responsible ways to manage the influx of state funds, paying down principal and interest and saving tax dollars is a good step.

Save for a Rainy Day

The state has substantially increased its rainy-day fund over the past decade. In 2010 the fund didn’t reach $2 million and now it’s nearly $2 billion though still well below the national median. These funds aren’t included in the budget surplus (currently about $4 billion) and the rainy-day fund amount isn’t enough to finance all state government operations for 2 full weeks.

Local governments have both reserved and unreserved fund balances, a portion of which may be ‘unassigned’ balances that can function like the state’s rainy-day fund, providing fiscal stability and available for emergencies and other contingencies. Supreme Court rulings and Attorney General’s opinions have said local governments cannot amass huge surpluses that are not designated for a specific use but can “maintain reasonable amounts necessary for the exercise of sound business principles.”

Some units of government have little to no unassigned fund balances while others have amassed quite large ones. Brookfield, for example, has an unassigned fund balance of roughly $15 million, which is about 3.4 months of their yearly budgeted expenditures. Similarly, Menominee Falls has just over 3 months of working capital in their unassigned fund balance. Healthy fund balances are important for avoiding debt, general fiscal stability and maintaining good bond ratings. Local governments that have an amount equal to a quarter of their budgets in an unassigned contingency account have no need to accumulate more tax dollars.

But for the local governments which have little or no unassigned fund balances, the influx of state dollars could allow them to put money aside to realize the benefits of a solid fund balance, which is a more responsible budgeting option than using the new money to finance new spending.

Saving And Investing For Future Projects

Every level of government should plan for short- and long-range capital spending. Police cars and ambulances need to be replaced; roads, buildings and bridges need maintenance and repair. Planning – and saving – for these future needs is another way local governments can be responsible stewards of tax dollars. When local governments rely primarily on borrowing to finance these predictable needs, the debt service drives up the cost to taxpayers.

Some local governments rely entirely on bonding for capital projects, others go to referendum, but responsible savings and investment plans are a tool that can minimize the use of these options.

Locals can put aside funds for specific purposes in designated accounts within their budgets. But for longer-range planned expenses, they are also able to invest and grow the funds in advance of their need.

Local governments have access to the Local Government Investment Pool (LGIP) which is managed by the State of Wisconsin Investment Board, which manages the state’s nation-leading, fully-funded pension fund. Only about half of local governments participate in the pool, which has assets around $5 billion. The LGIP is just one option (local financial institutions may be another) for local governments to earn returns on tax dollars – which can then be used to decrease the cost of capital projects, instead of borrowing which increases project costs.

Tax Relief

The state is sitting on a $4 billion surplus, after beginning the budget cycle, fresh off billions of federal pandemic “investments,” with a $7 billion surplus. The governor vetoed the majority of the tax cut the Republicans sent to him, leaving only $175 million in tax cuts; that’s only about 3 bucks a month in tax relief for the average taxpayer. It appears unlikely that there will be an agreement on further tax reductions – the governor opposes both a path to a fair, flat tax, and even to cuts to the income bracket that starts at roughly $28,000, while the legislature (so far) has resisted Evers’ ‘tax cut’ ideas that consist largely of credits targeted to specific groups rather than broad based, true cuts.

The increase in state spending on local governments topped 36%, and future increases are tied to the sales tax. As taxpayers pay more in sales taxes as has been the case with generationally high inflation, local governments get to up their spending proportionally. We pay more, they spend more.

The state isn’t the only unit of government that can deliver tax relief. Local governments can cut their levies, reduce or eliminate other taxes they impose, like the wheel tax, room tax, or local sales taxes, or provide relief in the form of cuts in fees for government services. These are potential options for local officials looking for ways to keep government growth in check.

It’s also worth mentioning that the communities that have built up large fund balances did so by setting aside money for a number of years, and the funds they were setting aside could now be used for tax relief. Whitewater recently achieved their goal of an unassigned fund balance of 20% of their budget, freeing up the $100,000 per year they had been putting toward that goal. Those funds could also be repurposed for tax relief.

You Can Say Yes To Responsible Budgeting

Whether you’re a local official or a taxpayer who is funding higher local (and state!) government spending, it’s important to know there are responsible local budgeting options that don’t involve creating new programs or growing existing ones. If there is a will to be a conservative steward of tax dollars, there’s a way.

Download and print our one-pager with responsible local government budgeting options.

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