The Covid-19 Fiscal Fall-Out for Cities and Villages

April 2020


While it is too soon to project the full range of fiscal impacts to municipal governments resulting from the country’s economic crisis, certain key revenue streams will take a hit, including collections from fees, fines, and permits. Those governments that rely on tourism- and recreation-related fees and the small handful that are allowed to levy sales taxes likely will face daunting challenges.

Wisconsin’s municipal and county governments clearly will not be spared from the financial havoc the COVID-19 crisis is wreaking on the nation’s economy. Compared to those in other states, however, local governments here possess distinct advantages that should help them weather the crisis. Still, all local governments here will suffer impacts and for some the effects will be immense.

The advantages include reliance on a primary source of taxation (the property tax) that tends not to be as immediately impacted as other taxes by sharp economic swings; and sources of state aid that, for now at least, are written into the current state budget that runs through June 30 of next year. The Forum has warned in the past of the drawbacks of Wisconsin’s reliance on these two local revenue streams as opposed to a more diverse revenue portfolio. In this crisis, however, it may actually prove beneficial. Wisconsin municipalities and counties also may be aided directly or indirectly from the $150 billion allocation for state and local governments in the recently passed federal relief package.

Yet, like virtually all segments of society and the economy, local governments in the state still will face daunting financial challenges. While the property tax is the primary source of tax revenue collected by cities and counties, 68 of the state’s 72 counties and a handful of municipal governments also collect sales taxes, which will decline sharply for the foreseeable future.

Similarly, collections of certain user fees charged for items ranging from bus ridership to zoo admissions to building inspections – as well as fine collections from parking and other municipal violations – are likely to decline precipitously until American life is restored to some semblance of normalcy. Other challenges could include an increase in delinquent or unpaid property taxes and fees and a failure of revenues in tax increment districts to grow at levels needed to service debt. Furthermore, in many cases, local governments may not be able or willing to make spending cuts to offset those lost revenues since it would mean furloughing or otherwise impacting workers.

In this report, we provide a broad overview of city and village revenues in Wisconsin and how they might be most affected by the COVID-19 crisis. In a follow-up report in the near future, we will undertake a similar examination of counties.

Our analysis examines general revenues for cities and villages in Wisconsin, which likely include the majority of the revenues that could be most impacted by the current crisis. As reported to the state Department of Revenue by the municipalities, general revenues include property taxes, state and federal aids, charges for services, license and permit fees, fines, and more. They do not include the proceeds from bonds and other debt. The revenues included here flow into municipalities’ general funds as well as other core governmental funds such as those for libraries, debt payments, and capital projects.

This analysis does not include what are known as proprietary funds, which generally include those city and village operations that are run more like businesses (e.g. water, sewer, and electric utilities). Though in many cases the revenues in these funds will be at least relatively stable, some could take moderate to substantial hits. For example, public utilities have been directed by an emergency order of the Public Service Commission to offer deferred payment agreements to customers, which particularly could impact cash flow for municipal-owned water utilities if large users avail themselves of that option. Other revenues most likely to be affected in just these funds include public charges for parking lots, ramps, and meters (totaling $65.4 million statewide in 2018), airports ($5.8 million), and mass transit fares ($29.7 million). Though not included in our main analysis, policymakers also should expect potential losses in these areas.

The big picture

Wisconsin has a relatively unique framework for financing its municipal governments, as we discussed in detail in our February 2019 report, Dollars and Sense. As we explained at that time:

More than a century ago, Wisconsin made the choice to use state income and later sales taxes to provide aid to local governments while generally not allowing municipalities to levy those same taxes. Today, cities and villages in Wisconsin rely on the property tax to a greater degree than most states nationally and any other state in the Midwest region.

As shown in Figure 1, 43% of the revenues taken in by Wisconsin’s 601 cities and villages to support general government functions in 2018 ($2.4 billion) came from the property tax. State aid and other intergovernmental revenues were the second largest source of income for cities and villages at $1.2 billion, or 22%. Of that amount, more than half ($674 million) was from the state’s shared revenue program, which is a form of aid provided to local governments that they can use at their discretion. About $224 million came from state highway and road aids, while federal aids comprised about $95 million of the intergovernmental total.

Cities and villages received $3.5 billion in combined total state aids and property tax revenues in 2018, or 62% of their total revenue. Ironically, while previous Forum research has pointed to the disadvantages associated with such heavy reliance on just these two revenue sources, this circumstance may be fortuitous for Wisconsin municipalities as they prepare for the fiscal impacts associated with the COVID-19 crisis.

Unlike sales and income tax collections, which can plunge quickly and dramatically during an economic recession because of a sharp rise in unemployment and drop in consumer spending and income tax withholding, property tax collections tend to take a longer time to decline if they do so at all.

Similarly, while cities and villages may be concerned that their state aids will diminish in the future as the state confronts its own fiscal hardship, state aid levels have been set through the current state budget, which extends until June 30, 2021. Consequently, although there is uncertainty about the length of this crisis and the choices lawmakers may need to make, it is not yet apparent whether they would change current law to alter state aid amounts that were scheduled to be paid before the crisis broke.

Other major sources of city and village income in 2018 were charges for services (i.e. user fees for services like garbage pick-up or ambulance transports), at $480 million (8.6%); and revenues collected by tax increment districts, at $468 million (8.3%). The “other taxes” category shown in Figure 1 comprises $259 million (4.6%) of the total. Payments in lieu of taxes from property tax-exempt entities and room taxes comprise about four fifths of that total.

In the pages that follow, we dive deeper into the major forms of tax, fee, and other locally-generated revenue that cities and villages count on to finance their general operations. Our purpose is to provide a broad assessment of the vulnerability of those sources in an economic recession.

Property taxes

As shown above, property tax collections are the largest source of income for Wisconsin’s cities and villages, generating $2.4 billion in 2018. Clearly, if property tax collections diminish significantly as the COVID-19 economic crisis plays out, then that would have a substantial impact on municipal finances and services.

While all cities and villages depend heavily on property taxes, the degree of reliance does vary widely. For example, some municipal governments make broader use of fees and receive higher levels of state aids. Figure 2 shows the variation among the state’s 20 largest cities and villages (by population). The state’s largest city, Milwaukee, had a total property tax levy of $261 million in 2018, but that comprised less than 30% of its total general revenue. Conversely, the $231 million levied by the state’s second largest city, Madison, comprised 60% of its total general revenue, largely because it receives far less in shared revenue payments from the state.

The good news for local governments is that even though property values typically do fall (and often sharply) during economic downturns, decreases in property taxes due for the current year do not decline because there is a lag between the onset of the downturn and the time it takes to conduct and incorporate new property assessments that quantify the loss in value. In fact, property tax levies set later this year for taxes billed in December and collected in 2021 will be based on valuations as of January 1, 2020, which means that the impacts of diminished values will not be reflected until 2022 budgets are adopted.

Even more important is that policymakers can choose to offset any decline in property values by raising property tax rates. Because state-imposed property tax levy limits are linked to the levy amount, there is no legal impediment preventing local policymakers from raising rates to ensure they are receiving at least the same amount of property tax levy from year to year despite a decline in values. The levy limits would generally prevent them, however, from increasing tax rates by an amount that would yield an increase in the operating levy that exceeds the increase in net new construction.

Of course, while legally permissible, political and economic factors may discourage local officials from raising rates in a manner that will maintain the level of taxes previously levied. Depending on the length and depth of the current economic crisis, policymakers may deem it unfair to ask property owners to pay the same amount of property taxes from year to year as they experience sharp declines in the value of their property. That is particularly true as residents experience other hardships ranging from unemployment to higher medical bills, and as economic policies at the national and state level seek to put more money in the hands of consumers to encourage spending.

It is also worth noting that the all-but-certain onset of recession will slow new development in many communities. That, in turn, will restrain the ability of local officials to raise their levies to accommodate new crisis-related spending needs, assuming the state continues to link levy limits largely to new construction.

An immediate concern for many cities and villages is the almost certain substantial increase in delinquent property tax payments. While 2020 property tax bills were issued in December 2019 and some property owners paid those bills in full by the end of the year for tax purposes, most local governments give citizens the opportunity to pay their bills in installments during the first several months of the following year. Consequently, when the crisis hit, many governments had received only a portion of the taxes owed for 2020, and they may have difficulty collecting some unpaid amounts.

While creating an immediate cash flow challenge, unpaid property tax bills should not be as big a concern for many municipalities over the longer term because they turn over their delinquencies on real property to their county government to collect and they are paid in full for the unpaid taxes. Counties may benefit from this arrangement – depending on their success in collecting – by also charging interest-based fees for late payments. Municipalities do collect delinquent taxes on personal property such as certain equipment, but that is for lesser amounts.

Milwaukee is one municipality that collects its own delinquent taxes and the city could be particularly vulnerable to a large financial hit if large numbers of delinquencies occur. The city typically covers delinquent property tax collections with short-term borrowing, which would cushion the blow for 2020. However, failure to collect on a vastly increased volume of delinquent tax collections would have more significant longer-term impacts for the city, as would a significant increase in the number of foreclosed properties.

Finally, Gov. Tony Evers has proposed waiving interest and penalties on delinquent property taxes owed in 2020 and letting municipalities collect this year’s taxes in further installments. Both proposals could affect collections.

One final element related to property taxes is special assessments on property owners that are sometimes used by municipalities to help pay for street, sewer, water, lighting, and other improvements. While not categorized as property taxes (these are included in the “Other” category in Figure 1), special assessments typically are included on property tax bills and collections of these revenues may similarly suffer as property owners face financial turmoil. Cities and villages collected $43.2 million in special assessments in 2018.

Charges for Services

Charges for services – which are user fees and similar payments received by cities and villages for services like solid waste removal, bus rides, and admission to parks and cultural facilities – were the third largest source of general revenues for cities and villages in 2018, generating about $480 million. In this discussion, we focus primarily on service charge revenues used for general government operations; fees that flow to proprietary funds established solely to support enterprises like sewers and airports are not included. However, it is worth noting that charges listed as general revenue by some local governments may be placed by others in proprietary funds. As shown in Figure 3, the range of such service charges is vast, with 13 specific types of charges generating at least $10 million.

Fortunately, the largest sources of service charges appear to be less vulnerable to immediate and severe disruption from the COVID-19 crisis. For example, demand for the three largest areas of fee-based services – garbage collection, ambulance transport, and sewage – presumably would not be greatly affected by high unemployment rates or economic distress, although revenue from garbage and sewage fees may decline if there is a steep rise in foreclosed properties or decreased commercial or industrial use. Ambulance charges, on the other hand, unfortunately would not be expected to fall and could increase during the crisis.

Perhaps the biggest near-term challenge will be municipalities’ ability to collect those fees as fewer individuals who are charged are able to pay them. Also, some local governments may consider waiving interest and penalties on late payments for municipal fees, which currently may be a small but important form of revenue. For some municipalities, their county governments also will share this risk, as payments on delinquent taxes often are applied first to unpaid fees, thus reimbursing the municipality but adding to the amount of delinquent taxes left to be collected by the county.

Further down the list of fees shown in the figure we do see a handful of categories that are likely to suffer from the crisis. The most obvious are fees related to use of parks, libraries, and other recreation and cultural facilities (including zoos, museums, and marinas), which will decline considerably in light of stay-at-home and social distancing requirements for the foreseeable future. For most cities and villages, these are not large sources of revenue. However, as shown in Figure 4, for areas that rely heavily on tourism, recreation and cultural fees can comprise between nearly 10% to more than 30% of total general municipal revenues.

Fines, Forfeitures, Licenses, and Permits

Revenues collected from fines and forfeitures accounted for $57 million (1%) of general city and village revenue collections in 2018, while those collected from licensing and permitting activities generated about $153 million (2.7%). With regard to the former, the vast majority are derived from fines paid for municipal code and ordinance violations, such as speeding or parking tickets or possession of small amounts of marijuana. Meanwhile, the largest sources of municipal licensing/permitting fees are associated with building permits and inspections as well as business and occupation licenses related to activities like selling alcohol.

While not a major source of revenue for most cities and villages, these sources stand to be impacted significantly by the current crisis. For example, with far fewer people driving and parking, the issuance of traffic and parking violations may diminish sharply; that may be the case not only while stay-at-home and social distancing restrictions remain in place, but also over the longer term (though to a lesser degree) as fewer people commute to work amid high rates of unemployment. Also, new construction and business activity will be dampened, thus reducing the number of inspections and permits.

We examined the 20 largest cities and villages by population to gauge their vulnerability to substantial losses of fine, forfeiture, license, and permit revenue and found a high degree of variation (see Figure 5). On the high end, these revenue sources comprised more than 5% of total revenues for Menomonee Falls and New Berlin in 2018, while on the low end they comprised closer to 2% for Milwaukee, Oshkosh, Wausau, and Beloit. The average for the 20 cities and villages is just under 4%.

Room and Resort Taxes

Tax collections from tourism-related activities are one of the areas that obviously stand to suffer most from the restrictions associated with the COVID-19 crisis. In 2018, cities and villages collected $78.0 million in taxes from hotel and motel room stays. In addition, a handful of communities that are authorized to levy local sales taxes by virtue of their classification by the state as “premier resort areas” collected $10.4 million from those taxes. Fortunately, the combined $88.4 million in room and resort taxes represented only about 1.6% of city and village general revenues in 2018.

The room tax is levied on the cost of a hotel room but not on food or other lodging amenities. It is generally limited to a maximum rate of 8% and is imposed in addition to any applicable state and county sales taxes. The room tax is one of the few local taxes available to municipal governments in Wisconsin, though the proceeds must largely go to tourism promotion.

Cities and villages also may impose a “premier resort area” sales tax if at least 40% of their equalized property value is used by tourism-related retailers (some exceptions and special provisions also apply). Currently, four cities and three villages levy such a tax on applicable sales made by tourism-related retailers. The sales tax rate is 0.5% for five of the municipalities and 1.25% for Lake Delton and Wisconsin Dells.

While room and resort taxes comprise only a small proportion of total city and village revenue collections, for some communities the impact of vastly diminished collections will be substantial. Figure 6 shows that for premier resort communities in Door County and the Wisconsin Dells, these sources comprise upwards of a quarter of their overall revenue streams. The impact in those communities could be severe and difficult for them to absorb without state or federal assistance.

In addition, the revenue amounts collected in municipalities elsewhere in the state (including those in Milwaukee, Dane, La Crosse, and Eau Claire counties) are not insignificant. The city of Milwaukee is an exception here, as taxes on the city’s hotel and motel stays flow to the Wisconsin Center District. These figures also do not include room taxes collected by seven communities in Brown County that go toward a convention and expo center there.

The Bottom Line

The already challenging fiscal climate facing Wisconsin’s cities and villages undoubtedly will become far more difficult as the economic impacts of the COVID-19 crisis reverberate. Yet, the primary factors that have created municipal budget challenges over the past several years – heavy reliance on property taxes and state aids that have been constrained by state-imposed levy limits and the state’s own budget challenges – now appear advantageous for the time being. That is because, as discussed above, both of those sources are likely to be less vulnerable to sharp and immediate declines than the revenue streams on which state government and municipalities in some other states depend, most notably sales and income taxes.

Despite this fortuitous circumstance, cities and villages will experience negative impacts of varying degrees from loss of revenues generated by fees, fines, and permits. As one village administrator we interviewed noted, even a 5% decrease in a municipal government’s total revenues can force policymakers to consider immediate cuts in staff and services, or potential property tax increases in future budgets.

Moreover, as we have shown in this report, some municipalities that are particularly dependent on revenues from tourism- and recreation-related activities are likely to see revenue hits of considerably more than 5%. As we noted in a recent report, these communities also stand to suffer significant losses in private-sector jobs and employment.

The ability of individual cities and villages to weather their negative revenue impacts will be affected by the health of their general fund balances going into the crisis, as well as the extent to which COVID-19 impacts require both initial and prolonged additional spending on equipment and staff. The need for added spending not only will be felt in obvious areas like emergency medical services, but also with regard to needs like enhanced technology for employees to work remotely, wage increases for certain high-risk positions, or one-time investments in health care equipment or facilities.

Furthermore, the sharp stock market downturn likely will create the need for increased contributions by cities and villages to the Wisconsin Retirement System. The prospect of increased pension payments will be an even greater threat to the city of Milwaukee, which administers its own pension plan that already faced a sizable unfunded liability before the stock market plunge.

A potentially positive factor is reimbursement or enhanced forms of aid that might be forthcoming from the state’s share of the federal relief package or via direct state funding. The CARES Act is estimated to include nearly $2.3 billion for Wisconsin, with at least $1.9 billion going to the state and the rest available to its three largest local governments ($103 million for the city of Milwaukee, $165 million for Milwaukee County, and $93 million for Dane County), according to the Legislative Fiscal Bureau. At the state level, a relief package developed by Gov. Tony Evers – which has not yet been acted upon – included a 1% increase in shared revenue payments.

Overall, while individual impacts will vary, most of Wisconsin’s cities and villages will have to determine strategies to handle diminished revenue streams for the remainder of 2020 and will face far more difficult fiscal challenges than originally anticipated as they begin to prepare their 2021 budgets. Stay tuned for our next edition of Taxpayer, which will explore the outlook for county governments and the unique challenges they will face.