McCallum proposal raising blood pressure, lowering bond ratings
Gov. Scott McCallum’s proposed phase-out of state-local revenue would not only force a dramatic change in levels of government service but also would have a chilling effect on development in the state, local municipal officials say.
Under the proposal, virtually all municipalities would be barred from raising their tax levies faster than the rate of their population growth and of inflation.
The levy limit would affect all towns, cities and villages with property tax assessment rates of more than $1 per $1,000 in property value (the mil rate). The average mil rate for cities in Wisconsin is $9. The average mil rate for villages is $6, with towns having the lowest average mil rate at $3.
According to municipal officials and developers, the limit would effectively halt commercial and industrial development, as municipalities faced the prospect of providing municipal services to additional areas without increased revenue. Particularly hard-hit would be Tax Incremental Finance (TIF) developments, which rely on an increased levy to pay for infrastructure improvements. TIFs are often financed through the issue of municipal bonds. Lacking the prospect of an increased levy, bond ratings could plummet.
A representative from the Wisconsin Department of Revenue (DOR) said the administration considered the effects of the proposal on municipal TIF projects, but did not think it would be significant.
"I think that we don’t view the proposed changes in the budget reform bill as a detriment," Tom Ourada, DOR executive assistant, said. "What could happen is you may see the timelines extended a little so the life cycle of a TIF may be longer. Right now, the average life cycle is 12 to13 years – the costs are paid off in that period. By law they have 20 to 23 years. We are thinking that if the bill does become law, you may see a little bit of an extension to pay off the cost of the borrowing. It should not restrict or stop them."
One of southeastern Wisconsin’s fastest-growing municipalities has already reacted by halting development. The vote by the Pleasant Prairie village board has put development on hold in that Kenosha County community.
"They directed the staff to put a moratorium plan together to prepare for when the governor’s plan is put in place when there are levy limits," Pleasant Prairie village administrator Michael Pollocoff said. "We would not accept any more plans for commercial or industrial development. Manufacturing we might be a little more lenient with because, typically, they are not big consumers of services."
Pollocoff said he has had meetings with major developers working in the village – including Wispark and Vincent Kuttemperoor of V.K. Development – and made clear the village’s position.
One of the projects on hold in the village would be the development of TIF #3 on I-94 and Highway 165. Pollocoff said interest in the 900-acre business park was high, and the first 20-acre project – being undertaken by Jockey – is already under way.
"We have already put the brakes on those 900 acres of commercial and industrial land," Pollocoff said, indicating infrastructure would not be extended to the remainder of the park until the village knew how it was going to pay for it.
The village would face what amounts to more of a triple whammy as McCallum is also proposing the elimination of payments to municipalities where power plants are located.
That power-plant-related revenue sharing device was put into place because power plants are exempt from local property taxes. Pleasant Prairie is home to a 1,160-megawatt Wisconsin Electric plant — the state’s largest coal-fired electric generation facility – and would lose about $1.25 million in shared power plant revenue from the state each year under the proposed plan. The village is also the proposed site of a 1,050-megawatt merchant plant proposed by a state subsidiary of PG&E National Energy Group.
"The village board adopted a resolution that indicates the proposal is the economic dismantling of local government," Pollocoff said. "The taxes new development pays are not going to buy you more snow plows or patrol time. The property taxpayers get a cut in their taxes, but they have to share their services with more people. In Pleasant Prairie, where we have TIFs, there is no longer an increment — so you cannot issue bonds to drive that economic explosion. If you can’t get the increments because of the frozen levy, you can’t get the development done. … If someone is looking to have Wisconsin revert to an agrarian time, this would do it. I don’t think you will find people willing to issue bonds to a community whose levy cannot increase."
While Pollocoff was critical of McCallum’s proposal, he also expressed frustration with the governor’s political opposition.
"I have gone back and forth on this," Pollocoff said. "I haven’t seen the Democrats come up with any cuts they are willing to make at the state level."
Dan Thompson, executive director of the League of Wisconsin Municipalities, was a little more philosophical than Pollocoff about McCallum’s proposal, pointing out that levy limits were in place in the state before – between 1975 and 1983. However, as in McCallum’s proposal, the limit could be exceeded by referendum, and, given the rate of inflation during the ’70s, some allowable increases were substantial. But Thompson did indicate that the mere suggestion of eliminating shared revenue would have a cooling effect on the state’s development climate.
"The governor’s bill has just been introduced," Thompson said. "What we really have is a speech – a press release. The governor’s budget bill was primarily designed to raise campaign contributions from Wisconsin Manufacturers and Commerce and from the Wisconsin Education Association Council. There doesn’t appear to be very much legislative support."
Until it becomes clear to what degree McCallum’s proposal is adopted, there is only so much that municipal officials can do to prepare, according to Thompson. But most of what can be done will include spending cutbacks.
"The 2002 budget has already been adopted and the tax bills have been sent out," Thompson said. "A lot of those tax bills have already been paid. Municipalities might hold up on some purchasing, delay some capital improvement projects. Municipalities might need to do some type of adjustment in the 2002 calendar year. One reason for that is that this is a terrible time to be issuing municipal debt. If you have a choice between buying a bond issued by a municipality in Wisconsin and one in Arizona or Utah … clearly the risk of buying a bond from a municipality in Wisconsin has just gone up based on the governor’s speech. The purchasers of municipal bonds are very conservative people. For municipalities that are interested in new industrial parks, new bridges, now is not a good time to be investing in those things."
Thompson said McCallum’s line of rhetoric alone will lead to postponed development. There will be less of a negative effect in areas with high property values and low tax rates than in lower-value, higher-tax communities, he said.
Construction sector affected
In a down economy, general contractors, engineers, architects and other construction industry sector companies have been particularly thankful that municipal projects are running on a different clock than the rest of the economy. Associated General Contractors economist Ken Simonson has predicted, however, that in the year ahead the municipal sector will slow down, the delayed reaction due to the longer timelines involved in infrastructure planning and budgeting. But the specter of the shared revenue issue could in turn send the municipal sector down the sewer when it would otherwise have still been circling the bowl.
"We expect many projects to be put on hold," Steven Godfrey, Wisconsin business developer for the civil engineering firm Baxter & Woodman said. The firm designs and provides construction-related services for municipalities in Wisconsin from an office in Burlington, but performs most of its work in Illinois, where it is headquartered.
Godfrey said the firm’s presence south of the border could be a real godsend if McCallum’s proposal is in fact adopted. But he also said not all client organizations would be affected equally.
"One area we have discussed is that it would not affect sewer and water utilities as much as municipalities," Godfrey said. "Utilities do not necessarily depend on tax dollars. They are more compliance-driven and focus on keeping up with state regulation."
March 1, 2002 Small Business Times, Milwaukee
