City Assesses Its Options in Repaying Huge Losses in Lawsuit

The refund owed by Wauwatosa to a health care provider after a losing lawsuit over seven years of taxes will equal one-quarter of the amount taxpayers already pay in a year to support city operations.

The city's options to repay nearly $8.4 million in taxes and interest to Wheaton Franciscan Healthcare will be ready for review and possible action by Common Council members Sept. 6, according to city attorney Alan Kesner.

Among the options: borrowing, tapping city reserves, increasing property taxes or some combination of any or all of those possible payment sources, Kesner said.

Kesner said it is in the city's best interest to settle the issue and pay Wheaton sooner rather than later, as "it costs a lot money to pay that interest" on the millions of dollars the city must repay Wheaton.

A recent requires that the city repay Wheaton taxes it has paid in protest on its outpatient clinic at 201 N. Mayfair Rd. since the facility opened in 2003 through 2006. That ruling set precedent for other pending lawsuits in which Wheaton, formerly Covenant Healthcare System Inc., seeks repayment of taxes paid in protest from 2007 through 2010.

Much of clinic ruled exempt from taxes

The ruling supports Wheaton's claim that significant portions of the outpatient care center are exempt from property taxes because the facility is used primarily to support the tax-exempt St. Joseph's Hospital in Milwaukee.

Wheaton's outpatient clinic currently is assessed at $57.7 million, Kesner said. The Supreme Court ruling reduces that taxable value by somewhere between 62 percent and 66 percent, he said, which translates into slicing up to $38.1 million in taxable property value from the city's current $5.3 billion total property valuation.

Wheaton estimates the city owes the health system $8.38 million for taxes, including interest, paid during the seven-year period, Kesner said. The city is conducting a legal analysis to determine if it agrees with that calculation, he said.

The city also is working with Wheaton with the goal of setting a final settlement figure that the city and the health system both can agree to and so avoid having to take up in court the amount of the settlement, Kesner said.

Although specifics of the payment process are confidential, Wheaton is “working with the city on a payment process that works best for all parties,” according to Wheaton spokeswoman Anne Ballentine.

The city also is conducting a financial analysis to determine how to repay Wheaton and when. In examining the city’s payment options, Kesner said, a key consideration is the fact that interest continues to accrue on the taxes due Wheaton until the debt is repaid. He said the city needs to balance additional interest costs with the timing of payment, as the city's costs only mount as time passes.

Determining the best payment option includes calculating what each option will cost the city over how many years, Kesner said.

How to bear the burden

Borrowing money means the cost of repaying Wheaton will be borne by future taxpayers, said John Ruggini, city finance director. Using existing city reserves translates into past taxpayers covering the cost, as reserves are built over time through year-end surpluses, Ruggini said.

And although new state law prohibits municipal property tax increases, raising property taxes to pay for judgments against a municipality are exempt from that law.

The estimated $8.38 million due Wheaton translates into nearly 25 percent of the city's $35 million portion of the total 2011 tax levy, Ruggini said. City property taxpayers paid $6.92 per $1,000 in assessed value to cover the 2011 tax levy for city services. The full property tax levy, including the shares that go to the Wauwatosa Schools, Milwaukee County, MATC and MMSD, is $21.84 per $1,000.

Just how repaying Wheaton will reflect on city property owners' future tax bills, however, is unclear, Ruggini said, until a final settlement figure and repayment structure are determined.  

Ruggini projects the city will have $15.5 million in reserves at the close of 2011. Of those reserves, $7.7 million is an undesignated general fund balance and $7.8 million is reserves for debt payment. If the city faces unexpected financial issues, general fund reserves can be used to pay city operating expenses and debt reserves are used to for debt payments. These reserves also can be directed to pay for unexpected expenses, like the Wheaton tax repayment.

While the city did not specifically set aside money to repay Wheaton, Ruggini said, "in sizing our reserves, we always took into account this possibility. ... We have the flexibility to consider (tapping the city's reserves) as an option" in structuring a Wheaton repayment plan.

Relying solely on city reserves to repay Wheaton isn't a viable option, according to Ruggini, as it would "reduce our ability to deal with unanticipated expenses."

In considering its options to repay Wheaton and what portion, if any, of the reserves to use, Ruggini said, the Common Council will need to decide the level of reserves needed so that the council is comfortable the city is able to deal with future unexpected financial issues. The city’s current level of reserves is within range of recommended levels, which are to have two months of reserves on hand to pay operating expenses and debt reserves sufficient to make debt payments for a full year.

Ruggini said the projected year-end $7.7 million general fund reserve equals 14.6 percent of the city’s total expenditures, or just shy of the amount required to cover two months of operating expenses. The projected $7.8 million in debt reserves exceed recommended levels, and reflect 113 percent of the amount required to make the city’s debt payments for a year, he said.

Kesner said the council's Budget and Finance Committee will be first to review the payment options and related financial risks under each scenario on Sept. 6, just before the Common Council meeting. The issue also will be on the Sept. 6 council agenda, so that if council members feel they have enough information, the council can make a decision then on how to proceed with repaying Wheaton.