City Might Help Out Schools in Recovering Lawsuit Losses
The cost to Wauwatosa would be the loss of projected TIF funds in 2015, but taxpayers and schools would be spared now.
Through some creative financing — which city officials say is perfectly legal and responsible — the city might save its schools some major fiscal pain.
Under a plan recommended by the city's finance director, Wauwatosa would borrow to replenish not only its own losses in a major lawsuit but also those inadvertently incurred by the Wauwatosa Public Schools.
Eventually, the school system would still have to repay the city. But the debt would be structured in such a way that both the city and the schools would pay off borrowed funds from the retirement of the Research Park tax district in 2015.
The Tosa schools received approximately $2.25 million in property taxes collected by the city from 2003 to this year from Wheaton Franciscan Health Care on a large portion of its clinic on North Mayfair Road. In July, Wheaton was awarded repayent of all the property taxes collected during that time, plus interest, in a 6-1 Wisconsin Supreme Court decision.
State law allows Wauwatosa to "charge back" all of the tax dollars, not including interest, that it collected and paid out to other taxing entities — the school district, Milwaukee County, MATC and MMSD.
On Sept. 8, Wauwatosa did repay Wheaton from liquid assets — money from the city's reserve funds. The total was about $8.4 million, of which about $6.2 million was in refunded taxes and just over $2.2 million was accrued interest.
The schools' $2.25 million share of that, comprising principal only, is more than the School District can safely afford to pay back at once. In Finance Director John Ruggini's words, "It would likely have a negative impact on its revenue cap, resulting in decreased state funds."
In the words of School Superintendent Phil Ertl, "We do not have $2 million just sitting around."
Ertl added, "It is all coming from the same pool; they're the same taxpayers," and said he was hopeful the city would find a way to see to it the school system was not harmed while still fulfilling its responsibilities.
Tapping future TIF funds
Ruggini believes he has found that way in one of several options presented Tuesday to the city's Budget and Finance Committee. Borrowing against the expected surplus generated by the retirement of the Research Park tax-incremental financing district in 2015 would supply all the needed revenue from the School District's projected share, and more than half of the city's.
The school district's share of the TIF's ending surplus is projected at about $2.57 million, Ruggini calculates, which would leave it slightly in the black after repaying the city for borrowing against that surplus.
"I think I speak for everybody, we don't want to penalize our schools," said Ald. Peter Donegan, a member of Budget and Finance. "We're sharing our strength with the schools."
The city, on the other hand, after receiving its $2.4 million share of TIF funds, would still be responsible for another $1.65 million in principal and $350,000 in interest to repay financing on the lawsuit pay-out.
That would be paid back out of city reserves under Ruggini's reckoning, but the key is not to let any of the reserve funds fall too low, possibly jeopardizing the city's bond rating or leaving it with insuffienct funds in an emergency.
The three largest reserves held by the city are the General Fund; the Amortization, or debt service, Fund; and the Health Life Fund. Of the three, the Health Life Fund is by far the "healthiest," sitting at 74 percent of all potential claims.
The "benchmark" for that fund — the amount recommended to be held against any reasonable expectation of increased claims — is only 30 percent, leaving a substantial buffer.
Donegan, himself a retired insurance executive, recommended paying the debt from that fund.
"Take $2 million out of Health and Life, borrow the rest (against the TIF surplus) and carry the School District," he said. "A 30 percent reserve is very healthy."
Ald. Dennis McBride concurred, saying, "Borrowing, although it seems counterintuitive, seems to be the best way. (The schools') taxpayers are our taxpayers."
Paying to avoid a greater backlash
Borrowing, as opposed to other options, will cost the city in debt interest, and ultimately those costs would trickle back to the taxpayer. But it would be a much softer blow than charging taxpayers to replenish those reserves in one fell swoop.
The option to replenish reserves by immediately raising property taxes has the advantage, Ruggini wrote, of rapidly replenishing the city's reserves without incurring borrowing costs.
However, he goes on, that would come with significant political and economic impact: A one-time tax hike in 2012 to pay back the Wheaton losses would amount to a whopping 11 percent increase for all taxpayers and a tax-bill uptick of $206 for the year for the average homeowner.
Another option would be to simply let the reserve funds already tapped to repay Wheaton lie below their optimal levels. But Ruggini points out that would not sit well with the bond rating agency that judges the city's financial health from the soundness of its ready reserves.
Finally, there is the option of targeting the taxpayer but spreading out the pain, replenishing reserves through increased property taxes over five to seven years. While that might make taxpayers merely grumble rather than froth, it would, like the previous scenario, leave the city vulnerable to inadequate reserves and weak bond ratings over a long period.
At any rate, the Common Council must decide upon and implement a payment plan before Nov. 30, Ruggini said, because the loss of investment revenues from cash reserves would adversely affect the city's cash flow to pay off complete and continuing capital projects.