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Report from the Finance Director on the 2027-2031 Five-Year General Fund Forecast
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Submitted by:
John Ruggini
Department:
Finance Department
Issue: In preparation for the 2027 Budget, it is helpful to understand long-term revenue and expenditure trends for the General Fund.
Background: The 2027-2031 forecast was developed using the same methodology as the previous five-year forecast. Revenues and expenditures were grouped into like-categories and forecast assumptions were developed for each category based on historical data or known information such as the state budget. Those assumptions are applied to the 2026 Budget figures. It is important to emphasize that the forecast is policy neutral as it assumes the same services are provided with the same number of personnel and delivered in the same manner.
The model used to project the annual budget gap the City will face is for planning purposes. It is not meant to suggest that the City will not make any service changes, will deficit or will use fund balance. As in prior years, the budget will be balanced in each year. The model does not include any service level changes and does not assume what decision might be made to balance the budget. It does reflect the policy positions included in the Financial Resiliency policy as described below.
It is important to review the assumptions and sources for forecasted information.
Base Assumptions
• A 3.0% property tax levy increase for the operating budget and 0.5% for debt service for a total 3.5% property tax levy increase is assumed for 2027-2031. It is assumed the City loses its ability to exceed levy limit caps in 2030 and that there is $159 million in net new construction in 2031 limiting the 2031 operating budget property tax levy increase to 1.3%
Property Tax Levy Increase Assumptions
|
|
Operating Budget Increase |
Debt Service Increase |
Total Increase |
|
2026-2030 |
3.0% |
0.5% |
3.5% |
|
2031 |
1.3% |
0.5% |
1.7% |
• Per the State of Wisconsin Legislative Fiscal Bureau forecast, a 2.2% increase in State Shared Revenue and assuming the change in CPI thereafter. Other State and Federal revenue are assumed to be flat over the five-year period
• Inflation assumed to be 2.4% in 2027 and remains at 2.3% thereafter based on Congressional Budget Office forecasts.
• Assumed use of General Fund Surplus remains $0.
• No assumed fiscal impact (positive or negative) of Fire Merger
• Annual cost of living increases in each of the five years based on inflation and current labor agreements. Typically, the budgeted cost of living increase is based on the May over May change in the Consumer Price Index which is estimated to be 2.5%. Given prior year’s inflation that exceeded cost of living increases, this was rounded up to 3.0%. We are out of contract with the Fire Union as of 12/31/23. The City’s arbitration offer was utilized through 2026. Since the police contract expires as of 12/31/26, CPI projections were rounded up to the nearest whole number to be used as estimates for both police and fire.
• Pension contributions increase .05 percentage points for employees and for the City. This is due to a presumed decrease in the 5-year investment returns earned by the Wisconsin Retirement Fund.
• Debt service based on 10-year capital spending reflected in 2025-2029 capital plan. Debt amortization continues to transition to a 15-year debt schedule as compared to a previous 10-year.
• Energy and fuel increases based on Department of Energy’s 2026-2040 forecast assuming 2026 budgeted consumption. The forecast assumes that the heightened fuel prices currently experienced return to normal by year’s end.
• Building permit activity based on an approximate 12-year average of $142 million of construction activity.
• Interest earnings based on current portfolio size adjusted for known changes (such as the utilization of American Rescue Plan funds) and current portfolio earnings rate. Future interest rates based on the Congressional Budget Office Treasury bill forecast.
• Assume 2025 municipal citation levels with 10% annual increase over five-year period as police staffing is assumed to stabilize. Peaks at 5,500 citations which is equivalent to 2023 levels.
• Parking enforcement returns to 2025 levels with 12,450 estimated tickets for 2027. Assume a 2% annual decrease thereafter as enforcement drives compliance.
• Assume 280 monthly billable ambulance runs in 2027 based on 2025 through present activity and a 1.5% increase thereafter. Also assume 2024-2025 average reimbursement rate per trip for 2027 and an annual $300,000 GEMT reimbursement with, a 2% increase Medicare rate increase thereafter.
• 863 hotel rooms assumed which reflect Radisson and Sonesta closing. No future change in number of hotel rooms assumed. Assume 2025 actual average tax revenue per room adjusted for 2026 based on running 12-month Average Daily Rate and Occupancy (RevPar) change. 2027-2031annual change based on CPI.
Figure 1 shows a comparison between the 2027-2031 and 2026-2030 forecasts. The new forecast shows a total 5-year gap of $3.8 million or approximately a 16% worsening over the prior five-year forecast.
Figure 1
The five year-forecast demonstrates the persistence of a structural deficit that will continue to threaten service levels. This deficit is depicted in Figure 2 as expenditures exceed revenues each year of the forecast. Fund balances fall throughout the 5-year period, dropping below our fund balance policy minimum of 2 months of budgeted operating expenditures in 2028 and plummeting to 52% of our policy minimum by 2031.
Figure 2
Over the five-year period, expenditures grow on average 3.15% (up slightly from the 3.0% from the prior forecast) while revenues are growing 2.3% (up slightly from 2.2% in the prior forecast) resulting in a 0.9% percentage point differential as shown in Figure 3. It is important to explain that while a five-year period is shown here, the gap would continue if additional years were shown. The only way to permanently fix the gap is to change the trend lines themselves - increase revenue growth, limit expenditure increases or preferably, a combination of both.
Figure 3
It is imperative that the budget gap is addressed each year through sustainable changes as the City has successfully done in prior years. A balanced approach is recommended that focuses on expenditure reductions, revenue increases and economic development that grows the property tax base.
It is illustrative to look at the 2027 gap to understand the main drivers of the structural deficit which are described in the attached presentation.
Recommendation:
While this report is for informational purposes only, it is important that City staff and the Financial Affairs Committee take the long-range projections into account when making decisions for addressing the 2027 Budget.
As in the past, the City’s goal is to focus on strategic budgetary changes as opposed to indiscriminate line-item adjustments. It is also important to emphasize that despite facing budgetary challenges, the City is an excellent financial condition with adequate reserves and an excellent record of strong financial management practices.
However, it is extremely important to note a fiscal cliff is approaching due to the assumed exhaustion of excess levy capacity. Whether or not this happens in 2031 as forecasted is uncertain, but without a change in state law or community approval of a referendum, it is certain we will eventually face this precipice despite increased state aid. The detrimental impact on service levels cannot be understated.
Staff will develop the Executive Budget based on the assumptions included in this report so we do request feedback on those key assumptions, in particular levy increases and cost of living adjustment. Staff will also report back on high-level strategies for balancing the five-year forecast.