Madison Says It’s Broke, Auditors and Investors Disagree

The City of Madison says it’s facing financial ruin if voters don’t approve a $22 million referendum next month, but independent accountants who audit the city’s books say the city’s finances are fantastic.

Independent Audit

Every year, state law requires large cities like Madison to hire independent auditors to review their books. They use Generally Accepted Accounting Principles (GAAP), which is the gold standard for accountants and investors. The final document is called the Annual Comprehensive Financial Report (ACFR) and is available on the city’s website. Year after year those auditors say the city’s finances are great and getting better.

“The City’s sound financial operations are expected to remain solid, supported by growing revenue from ongoing development and strong fiscal management,” according to the most recent audit report.

Over the past ten years, revenues have consistently outpaced expenses. Total revenues have grown 66% from 2014 to 2023, while expenses grew by 54%. Over that time, property tax revenue increased by 50%, program revenue doubled, and investment income jumped by almost 600%.

Madison’s most recent ACFR reported a $164 million total budget surplus for all activities, with a $105.4 million surplus for government-only activities for 2023. The total unassigned fund balance for the year was $80 million, which the city council can spend on anything it wants, according to the auditors.

The ACFR is 275 pages, and everywhere you look, you find good news for the city. Investors would be delighted to see that the city ended last year with $519.7 million in cash and investments with only $44.3 million in accounts payable (total government and business activities). For business activities, the city’s current ratio is a very healthy 1.8, with current assets of $149.4 million and current liabilities of $82.2 million. It’s no wonder Madison has a solid AAA bond rating.

“In its rating letter, Moody’s lauded the City's strong and diverse economic base, solid demographic trends, and solid financial position with stable operations. Additionally, the City benefits from a significant institutional presence derived from its status as the state capital and site of the University of Wisconsin’s flagship campus, and Moody’s believes the City will experience continued financial stability,” the auditors pointed out.

City Budget

Despite these glowing reports from auditors and investors, city leaders only see doom-and-gloom.

Madison Mayor Satya Rhodes-Conway told city leaders that the city’s financial situation is desperate, and they are faced with “stark choices between reducing our quality of life or increasing taxes on our residents.” Madison Finance Director David Schmiedicke says the city’s current deficit is “the worst we’ve seen.” According to the city’s 2025 Operating Outlook, “Madison has faced a budget deficit every year since the State imposed strict levy limits in 2011.”  

Accounting Methods

The reason why the city and outside auditors disagree about Madison financial situation comes down to different accounting methods. Whereas the auditors use GAAP, the city has its own way of looking at the numbers.

Despite the very different assessments, the city explained to the MacIver Institute that “the legally adopted operating budget is prepared in accordance to WI State Statutes for municipal budgets.”

The main difference between the two approaches is when bills get paid and when revenue is collected. In GAAP, expenses are accrued, which means they are recorded when they are incurred, not when they’re paid. Revenues are also accrued, which means they are recorded when they are earned, not when they are collected. The city budget, on the other hand, only recognizes expenses that are paid and revenues that are collected in the current year.

Despite those differences, one would expect that the two sets of books would average out to about the same over time, and yet they don’t. Part of the reason could be the city’s failure to successfully predict its revenues and expenses when budgeting.

Budget Accuracy

Every ACFR includes an audit of the city’s budget using the city’s own accounting methods. Those audits show that city budget planners always overestimate expenses and frequently underestimate revenues. For example, last year, actual revenues were $19.2 million higher, and expenses were $15.8 million lower than what was in the final general fund budget. That resulted in a budget surplus of $31 million and a fund balance $35 million higher than what was originally anticipated in the budget.

There are also inconsistencies in the city’s own narratives. For example, in the latest 2025 Operating Outlook, the city acknowledges that the “City finished 2023 with revenues exceeding expenditures by $31 million,” and yet maintains that it’s “faced a budget deficit every year since the State imposed strict levy limits in 2011.” According to the audits, the city hasn’t had an actual deficit since 2016.

Conclusions

GAAP became a hot political issue in Wisconsin when four CPAs got elected to the State Assembly in 2010 and formed the CPA Caucus. They insisted that GAAP was the best way to assess public finances. When the University of Wisconsin started to cry poverty a couple years later, the CPA Caucus used GAAP to review its finances and discovered the notorious billion-dollar slush fund in 2013.

There’s no need for a similar investigation into the City of Madison’s finances, because the audit reports are all there right on the city’s website. Unfortunately, the main problem with conducting an audit is that it isn’t available until after the fact. Meanwhile, the City of Madison claims that it is facing a $22 million structural deficit in 2025. History tells us that even if the referendum fails, the city will end up with a budget surplus and an even larger fund balance. Unfortunately, Madison residents won’t know that until long after they vote on the referendum.