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Promises to Keep Racine tops the state in per capita — percent increase in unfunded liabilities
SOURCESWisconsin Policy ForumFederal Highway AdministrationBoston Metropolitan Area Planning CouncilWis. Legislative Fiscal BureauRacine Taxpayers Association
While Wisconsin’s largest cities still face sizable unfunded liabilities for retiree health care, progress has been made to close the gap. Between 2013 and 2016, all but a handful of the state’s 25 largest cities saw their unfunded commitments decrease. Nevertheless, those cities still hold liabilities of more than $2 billion, with some of them facing obligations of hundreds, or even thousands of dollars per resident. Over the past several decades, many cities in Wisconsin made a seemingly modest commitment to their workers, agreeing to pay some or even all of their health insurance costs in retirement. As the cost of health care has shot upward, so has the size of this liability for local governments. But data on these post-employment benefits have remained out of reach for most citizens and elected leaders. Since 2007, national accounting standards have required the disclosure of these liabilities in financial reports. These numbers, however, do not show up in the budget documents that get the most attention from elected officials and the media. To shine light on the issue, we reviewed reports from Wisconsin's 25 largest cities from 2013 and 2016. At the end of 2016,the last year for which complete reports are available, these cities were looking at total unfunded liabilities valued at $2.25 billion. The commitments are known as "Other Post-Employment Benefits," or OPEB, and the vast majority of them concern health care for retirees. These liabilities aren't fixed or definitive. They are complex actuarial forecasts that rise or fall from year to year for reasons that we explain later. Some cities, for instance, are cutting their obligations by controlling their overall health care costs or by reducing the benefits offered to future retirees. Almost no communities, however, are setting aside any money to cover the commitments that remain. Cities are simply paying those expenses out of their regular annual budgets. In 2016, these 25 cities covered the health care costs of their existing retirees, but those payments amounted to less than half of the annual amount needed to pay down their liabilities over the next generation.
Mixed Progress Over the three-year period, most communities made progress in reducing their unfunded commitments to retirees. However, the projected costs in two cities–Milwaukee and Racine–rose so dramatically that they erased the combined gains in all the other cities. Between 2013 and 2016, the expected cost of these post-retirement health care benefits in Milwaukee and Racine rose by a total of $228.1 million. (See Figure 1.) That easily cancelled out the net $120.1 million decrease in those years in the expected benefit costs for the other 23 largest cities in Wisconsin and led to an overall increase of $108 million in retiree health care liability across the entire group. In one piece of good news, however, Racine officials say their projected liability will see a substantial drop in 2017 because of changes they have made to their benefits. These challenges are not entirely a big city problem. Madison, the state's second largest city,has a relatively modest liability for retiree benefits while much smaller cities such as West Allis and Beloit have substantial obligations. Given that municipal property taxes remain under state-imposed caps, the added expenses for retirees may make it harder for cities to maintain services such as parks, police, and fire protection. Local and state leaders can take a series of additional steps to help control these costs moving forward. But they have to balance these options with their need to keep and attract good public employees at a time of low unemployment.
Unfunded commitments Local governments in Wisconsin have offered retiree health care benefits dating back to at least the early 1970s. At that time of relatively low health care inflation, elected officials in some communities extended medical coverage to retirees to hold down salary increases or enhance overall compensation for workers. Since then, increases in health care costs have accelerated and more baby boomers have begun to retire. The bill is now coming due. The City of Racine tops the list with a per capita liability of $6,458.
IOUs to Employees Cities took on these liabilities by handing out IOUs of $200,000 or even more in health care benefits to individual retirees. For instance, in LaCrosse, a rank and file police officer hired in 2012 could potentially work for 20 years and then retire at age 53 with the same health benefits and same monthly premium as an active employee. Along with his or her spouse, the retired officer could then draw benefits until he or she was 65 and qualified for federal Medicare coverage. Ideally, local governments would have dealt with such costs by steadily setting aside money to cover the benefit as their workers were earning it. Instead, elected officials in some cities now face substantial liabilities that may force them to make difficult decisions on staffing and services to deal with the expenses. Many cities have been slowly addressing the challenge. As the Wisconsin Policy Forum detailed in an April report, the city of Racine once covered all of the health care premiums for life for qualified long serving employees who retired before 2007. Several years ago the city cut off the lifetime benefit for most employees hired after 2007 and reduced its share of premiums to between 90% and 95% for most workers retiring after that same date, Still, current employees and even new hires who meet the requirements can have most of their premiums paid by the city between their retirement and age 65. Many employees will be able to retire with this benefit at age 55 if they have built up 20 years of service. Estimating OPEB liabilities can be complex. Actuaries try to forecast variables such as what will happen with health care costs far into the future, how often workers will switch jobs, how long retirees will live, and how much health care they will need. In doing so, they estimate the present day value of all the benefits earned by an employer's current retirees and workers.
Law Gives Cities Options Local governments have little or no control over some factors that impact OPEB liabilities, such as the cost increases in health care services over time. But in other respects, state law gives leaders more options for managing costs for retiree health coverage than it does for pensions or other retiree benefits such as accumulated sick leave.
Reducing Costs Liabilities increased in seven of the 25 cities over that period, (See Table 1 above) with three communities seeing a substantial rise: Madison, Milwaukee, and Racine. Racine had the largest challenges for a city of its size. Its total retiree health care obligation grew $96.7 million, or 24%, between 2013 and 2016 to $503.2 million. The good news, city officials say, is that a forthcoming study is expected to show the liability dropped to $386 million in 2017. They said that was due to a variety of factors, including a decision to shift some retirees to a Medicare Advantage plan for prescriptions. Still Racine's 2017 projection for its obligation amounts to $4,953 per person. That was almost three times more than Milwaukee's substantial liability of more than $1,700 per resident in 2016 and 2017. Milwaukee will report in the coming weeks that its unfunded liability rose 4.1 % in 2017 to $l.06 billion. BUDGET IMPACT Currently, cities in Wisconsin are paying the cost of retiree health care as they incur it each year. In doing so, they are not setting aside money for future expenses. In 2016, these cities made $76.8 million in payments on these benefits, with essentially all of that going to pay for health care for current retirees. But if local leaders wanted to also start providing the necessary funding for their remaining obligations over the next 30 years, they would have needed to budget and invest $98 million more in 2016.
Foxconn the hope of Racine’s financial future?
SOURCESWisconsin Policy ForumFederal Highway AdministrationBoston Metropolitan Area Planning CouncilWis. Legislative Fiscal BureauRacine Taxpayers Association
Politicians, unable to lower taxes and make regulatory activities conducive to economic growth, have come to rest on a Taiwanese corporation to bring back jobs and economic recovery to this area.
In the mean time, locally, Racine’s unfunded retirement benefit liability looms in the future as a budget problem. Racine already has a budget rate twice the rate of Mt. Pleasant and Caledonia and three times that of Sturtevant. Further increases in Racine’s rate does not make it a viable place for businesses to come in and start up operations.
And the Mayor wants Racine to engage in environmental activities that have not been vetted for economic feasibility or even environmentally effective. Those actions beg for accurate studies of their validity.
How should local governments respond to declining transit ridership?
Bus ridership has decreased for most large transit systems in Wisconsin in recent years, following a national trend. So far, local governments have found ways to make up for lost fare revenue and avoid service reductions, though that may become more difficult if the trend continues. Research shows ridership declines worsen as transit services are cut.
Conventional wisdom has long held that transit systems lose riders when they cut service and gain riders when they add service.
But the latest ridership data from Wisconsin's five largest transit systems . appear to contradict at least part of that orthodoxy. Between 2014 and 2017, each system increased service overall as measured by total vehicle miles traveled, yet ridership declined among four of the five.
Wisconsin's losses were part of a national decline in mass transit ridership, but in many communities they were greater than the national average.
According to the Federal Transit Administration, transit ridership peaked nationally in 2014 at roughly 10.7 billion total trips before dropping to around 10.0 billion trips in 2017, a 6.4% decline. Bus ridership on Green Bay Metro, Madison Metro Transit, the Milwaukee County Transit System, and Racine's Belle Urban Systems all dropped at least twice as fast as the national average. Kenosha Area Transit was the only system to gain riders, for reasons that are unclear.
What causes ridership decline?
What forces may be driving decreased transit ridership? The strengthened economy, relatively low gas prices, and the rise of ride-hailing services are seen as possible factors nationally.
According to the Bureau of Labor Statistics, Wisconsin's seasonally adjusted unemployment rate fell from 6.1 % in January 2014 to 3.1 % in January 2018. As a result, some transit riders who are newly employed or earning higher wages may have purchased vehicles or chosen to drive more often. Wisconsin DOT data show the number of vehicles registered in the state increased from 5.6 million in 2013 to 6.0 million in 2017.
Federal Highway Administration data also show driving is on the rise again in the U.S. The total number of miles driven nationally was virtually the same in 2013 as in 2005 but increased 7.4% between 2013 and 2017.
Relatively low gas prices may be another factor. According to the U.S. Energy Information Administration, the average price of gasoline has increased over the last two years but remains substantially lower than in 2014.
Ride-hailing services like Uber and Lyft, which have grown dramatically since the recession, may also play a role. While transit systems and ride-hailing companies have formed partnerships in some places to boost usage, multiple national studies suggest that ride-hailing also is competing with transit in many places. For example, a recent survey by the Metropolitan Area Planning Council in Boston found that 42% of the region's ride-hailing trips would have been replaced by transit if ride-hailing was not available.
Impact on revenues
Lower ridership puts pressure on local governments to raise fares, find other revenue sources, or cut services. Between 2014 and 2016, the last year for which data is available, all five of Wisconsin's largest transit systems lost fare revenue, as shown on page two.
Increased local funding, primarily through property taxes, appears to be one way transit systems have avoided service cuts and actually increased service. Between 2014 and 2016, four of the five largest transit systems in Wisconsin increased local revenue for transit, including a nearly 50% increase for the Milwaukee County Transit System. Fares have increased in some communities as well.
Less service still = fewer riders
If ridership is down, why not cut services? Both past experience and research suggest cutting services likely would create a downward spiral.
Between 2000 and 2010, the Milwaukee County Transit System cut routes and service frequency. As a result, the transit system's total ser-vice (vehicle miles traveled) drop-ped 21.2%, from 22.2 million miles to 17.5 million. While other factors may·have contributed, ridership decreased 29.4%, from 52.9 million rides to 37.5 million.
Academic research also has found similar links. A recent study of the 25 largest transit systems in the U.S. and Canada found service levels and car ownership are the strongest determinants of transit ridership.
_ Economic ups and downs often result in fluctuations in transit ridership. While increasing transit service may not always lead to increased ridership, service cuts often bring about ridership declines.
It is surprising and encouraging that four of the state's five largest transit systems were able to add local revenue and all five increased service levels as fare revenues declined in recent years. Whether these trends will continue is uncertain, but the stakes are high given that service cuts may further reduce ridership.
Local governments turn to "wheel taxes" as other revenues lag
Inrecent years, Wisconsin has seen a sudden increase in local governments.establishing new vehicle registration fees. A local vehicle registration fee-otherwise known as a "wheel tax "-is an annual charge in addition to the state $75 registration fee for most vehicles. State law requires local governments to use the funding for local transportation costs.
For more than a half-century, Wisconsin law has given municipalities and counties the option to impose a vehicle registration fee, also known as a "wheel tax."
Until 2011, only four communities had such a tax in place. By the end of 20 17, however, the list of communities that had adopted the tax had grown to 27; from 2011 to 2017, wheel tax revenues nearly tripled from $7.1 million to $20.7 million.
Although wheel taxes remain comparatively rare-only a small fraction of the state's 72 counties and 600 cities and villages have one-their sudden growth raises a question: Why have so many local governments in Wisconsin turned to this previously little-used device? While individual reasons may vary, a look at state and local transportation funding as well as a survey of local road conditions offers some clues.
State road aids grow slowly
Local governments are responsible for maintaining local roads in Wisconsin, funded by a mix of state aids and local revenues. The two major state funding sources are General Transportation Aids (GTAs) and the Local Road Improvement Program (LRIP).
Limited revenues, bumpier rides
The vast majority of GTA and LRIP funding comes from the state's fuel tax and vehicle registration fees. Revenues from both sources have generally been flat in recent years. The gas tax has not been raised since 2006, and overall fuel consumption has declined. At the same time, the state hasn't raised vehicle registration fees since 2008, except for electric and hybrid vehicles this year.
Legislative efforts to raise transportation revenues significantly — either through an increase in the gas tax, state vehicle registration fees, or other_sources-all failed last year._State Transportation Secretary Dave Ross recently told our annual meeting "there is no interest whatsoever" in raising the gas tax, vehicle registration fees, or other state or local revenue sources.
Meanwhile, local governments in Wisconsin have few local revenue options other than the property tax, which has been tightly restricted since 2011. Though local governments are allowed to raise property tax levies only for new construction, there are exemptions for debt service and a few other circumstances.
One of the consequences of the tighter revenues appears to be less spending on local streets and roads. When we surveyed officials from nearly 500 cities and villages for our League of Wisconsin Municipalities report, The State of Wisconsin Cities and Villages 2017, many said they had shifted their spending priorities away from street maintenance to police and fire services since the start of the 2007-09 recession.
Wheel taxes accelerate
Against this backdrop, the appeal of the wheel tax becomes clearer. There appears no clear pattern among the local governments that have adopted the tax, which include the state's two largest counties (Milwaukee and Dane) as well as some of its smallest (Green, Lincoln, and Iowa); some of the largest cities (Milwaukee, Appleton), as well as some of the smallest municipalities (City of Lodi, Town of Arena).
Like other local revenues, the state still imposes some restrictions on the wheel tax, requiring that it be spent only on transportation. Although this plight appear to limit its usefulness, the new tax can be used to offset other revenues, such as property taxes or state aids.
As wheel taxes become more common, policy makers may want to consider whether they are the ideal tax source to support local roads. It may be argued that by taxing vehicle owners, the wheel tax links the costs of local roads to users. Conversely, some might argue that road users also include commuters and visitors and a consumption tax (such as a sales tax) might be more appropriate. Such a debate cannot occur because state law does not permit municipalities to levy sales taxes, and most counties already have implemented the optional 0.5% sales tax.
As more local governments consider the wheel tax, some state officials have already suggested additional limits on it may be needed. .In the meantime, however, its use may grow as long as local revenues are limited and demand for local road maintenance and improvements expands.