How an American city tackled a major budget gap

In 2022, the City of Milwaukee was on the verge of financial collapse. With an annual deficit projected to reach $200 million and possible bankruptcy on the horizon, the American city was facing the greatest financial challenge it had seen in its 177-year history.

Without a way to close the gap between its revenues and expenses, the city could be forced to lay off hundreds of police officers, firefighters and public works employees to offset pension costs that were rising faster than the rate of inflation. Officials feared crime could grow out of control. They imagined a city of 570,000 facing fierce winters in the state of Wisconsin without snowplow service.

“To say the situation was dire would be an understatement,” said Nick DeSiato, Mayor Cavalier Johnson’s chief of staff. “We were facing catastrophic changes to police and fire departments, our libraries. We were looking at a possible Detroit-style bankruptcy. We would have become a shell of a city.”

The city’s financial challenges were rooted in a combination of declining state-shared revenue and state-mandated limits on local tax levies, along with rising fixed costs like the pension obligations that were pulling funding away from community services. Emergency federal relief funding enacted during the COVID-19 pandemic had helped but was scheduled to expire in 2025.

With insolvency looming, the city’s business community, led by the Greater Milwaukee Committee (GMC), joined forces with the mayor’s office and city council in a collaborative rescue effort. Seeking an outside perspective and fresh ideas, the GMC engaged EY advisors to help assess the city’s financial situation and assist GMC with identifying potential options for the city’s consideration.

“This was a unique arrangement in that the business community mobilized to support the effort,” said EY-Parthenon Government Turnaround and Restructuring Partner and Project Leader Adam Chepenik, Ernst & Young LLP. “There was a great deal of collaboration from the beginning with city officials, the policy director, GMC leaders, the mayor and others.”

The project started with a review of the city’s overall financial situation, including available options. The analysis quickly demonstrated that, given the actions already taken by the city and the magnitude of the annual shortfall, the city budget deficit could not be eliminated solely through new efficiencies and belt tightening. Indeed, the city had been underfunded and scraping by for several years and had already taken steps to cut financial waste.

Unlike most cities of similar size, Milwaukee also lacked the authority to raise certain tax revenues without state approval. As a result, the city required state assistance.  Using the GMC analysis, the city was able to document the local actions it was exploring and could demonstrate to members of the Wisconsin Assembly that the mayor was taking steps to fix the situation. The State Assembly ultimately authorized additional flexibility for Milwaukee’s City Council to take additional fiscal measures, which produced an estimated $180 million a year to close the budget gap.

It was a strong start, and necessary, but not enough to solve the entire problem. Milwaukee still needed to find about $50 million in additional savings or income annually to fully eliminate the deficit and secure the long-term fiscal health of the city through more efficient service delivery. For a city already running as leanly as it knew how, it was a big challenge.

The EY-Parthenon teams brought together subject-matter professionals with experience in relevant areas such as public sector finances and restructuring, policy analysis, taxation, pension strategy and data analysis, as well as an understanding of real estate transactions, renewable energy, waste management and public health. The team included members with valuable direct experience in municipal budget administration who brought perspectives and knowledge of leading practices in other cities facing similar crises.

Working closely with city officials, the team used a diagnostic approach to survey the 50 highest-cost services to identify potential savings or new revenue opportunities. The effort aimed to provide recommendations in three broad areas: service improvement, financial planning and innovation infrastructure.

Source: City of Milwaukee data; GMC Report.

Substantial savings through better-run services

In the area of service improvement, the project identified 41 streamlining steps with potential to generate an estimated $140 million in savings over a 10-year period, $88 million of which could be considered quick wins — changes that could feasibly be implemented within six months — and $52 million in longer-term improvements.

The recommendations covered improvements in services across city agencies — fire, health, police, public works, neighborhood services, library and others. Measures included sharing some services, such as greenhouses and tree nurseries, with the Milwaukee County government; outsourcing some services, such as leaf collection and street sweeping, to external vendors to improve efficiency; and creating new incentives to achieve fleet maintenance savings. The report suggested ways to use technology to streamline services from street maintenance to garbage collection.

Multiple ways to save through smart financial trade-offs

In addition to the ideas to improve service delivery efficiency, the project uncovered a variety of financial planning recommendations that could have an estimated total impact — from new savings and revenues, including income from fees, rents and other sources — of more than $450 million over 10 years. These include measures such as leveraging city buildings and other assets for one-time or ongoing revenue and making changes to pension and health programs to reduce costs.

The GMC report suggested different ways to use city-owned buildings and facilities, such as selling aging fleet and recycling facilities occupying a desirable riverfront location and building more modern ones elsewhere. The city could gain one-time revenue from the sale and, in the longer term, tax income from the new development while achieving cost savings from the newer, more efficient facilities. It also identified other city buildings for possible consolidation or sale.

The GMC report recommended consolidating maintenance and operational staff for 20 staffed drawbridges, adjusting the service model for health clinics to reduce costs and improve services, modifying overtime policy and implementing a 10% fee to recover costs for special events such as parades.

Citing examples from other medium and larger cities, the report recommended different ways to monetize city assets, such as selling advertising space on trash containers, benches or bus shelters, as well as other opportunities to leverage parking, waterworks and even streetlights for income.

It also identified three buildings in the heart of the city, currently used for government offices, that could likely be consolidated into two buildings. The third building could be converted to rent-earning housing or private office space, creating additional revenue for the city.

The report mapped 90 recommendations according to their potential financial performance and equity impact (higher vs. lower value), as well as the estimated feasibility of implementation, giving a higher ranking to items that could be implemented by the city alone compared to those that would require city council or even state Legislative approval. The result was a grid that identified quick wins —higher value, more feasible recommendations — alongside those that could be considered longer-term goals.

“The feasibility and impact grid were especially valuable,” said DeSiato. “It acknowledges that you have things that are more and less feasible. It put all the options on the table, from quick hits to more difficult wish-list items.”

Activating the changes through a better innovation infrastructure

An important part of the engagement with GMC was to help GMC bolster the government’s so-called innovation infrastructure — to provide not just a to-do list of recommendations, but also to help city employees adopt new skills and ways of working, empowered by better communication, better tools and a culture of continuous improvement. The EY teams facilitated employee workshops to assist GMC in its focus on ways to improve the city’s performance in areas such as accountability, data analytics, employee-driven innovation and budgeting.

The process helped staff members adopt new ways of thinking about improving service delivery, DeSiato said. “One thing that came out of the study is a different kind of work process,” based on key performance indicators and quarterly departmental updates, he said. “We have a great cabinet and good people. It was important for our team to learn new ways to follow best practices by analyzing data”.

Mayor Johnson took the concept a step further and created a new role — innovation director — whose principal mission will be to prioritize and implement the GMC report’s recommendations, DeSiato said. “We’re using the GMC report as a blueprint for that new position. It shows the city is taking it seriously and not just letting it be a report on a shelf.”

Chepenik, of EY-Parthenon teams, said one of the ultimate benefits of the project was to provide the city with insights into the structural deficit it was confronting by providing a realistic financial forecast and list of potential challenges, as well as opportunities.

“Besides the practical revenue and cost-reduction options, the project indicated where and what to prioritize, and provided an assessment of how much could be potentially saved and an estimated time frame over which the savings could be achieved,” Chepenik said. “It also gave them tools to be able to improve the delivery of services and to be innovative.”

GMC President Brennan agreed. “The project was a way to surgically and creatively help us get to a long-term sustainable future,” he said. “The process had a big effect on the way they’re doing this, finding ways to cut millions of dollars from operations and deliver services more effectively.”