A new model for fiscal regionalism: greater Racines plan for overcoming fiscal disparity.

In recent years, observers of urban management have paid increasingly close attention to the governance of metropolitan regions. In a 2002 book on this topic, scholar and former municipal manager David Miller suggests that "there is a movement, albeit painfully slow, toward regional solutions to public problems in ... metropolitan areas. (1) Interestingly, Miller points out that while local governments in metropolitan areas are becoming even more diffused, they are also coming together more often to tackle issues of common concern. This increased collaboration no doubt owes itself to a recognition of the interdependency of metropolitan governments and the potential of cooperative solutions to difficult regional problems.

A strong case in favor of regionalism is eastern Racine County, Wisconsin, where leaders signed a landmark intergovernmental agreement on April 25, 2002. In one of the most comprehensive intermunicipal agreements ever negotiated in the state of Wisconsin, the City of Racine and six villages and towns set the framework for how the area will develop over the next 50 years. The agreement includes provisions for the sharing of costs for a major wastewater treatment facility expansion and upgrade, sharing of costs for cultural amenities, and one of the largest municipal property tax revenue sharing plans in the country. The agreement has set the course for a shared vision of future expansion that will serve the entire region, and has charted new territory for intermunicipal cooperation.

A CITY AND ITS SUBURBS

Racine County is located on the western shore of Lake Michigan, approximately 65 miles north of Chicago and 25 miles south of Milwaukee. Like many areas with a large central city, eastern Racine County has been characterized by large fiscal disparities and competition among municipalities for property tax base. The City of Racine has a high tax rate and low fiscal capacity relative to that of neighboring communities. This has resulted from a combination of factors over the last four decades. In recent decades, Racine's industrial base has eroded, as many businesses lost jobs to foreign competition. The majority of new job growth and related residential development occurred in the surrounding communities. Racine's share of the area's manufacturing and commercial property values fell 12 percent between 1990 and 1998, from 62 percent to 50 percent. Between 1990 and 2000 the city also lost 2.9 percent of its population. Racine now has 81,855 residents, down from a high of 95,162 in 1970.

While Racine lost population and its tax base, the towns of Caledonia and Mount Pleasant and the Village of Sturtevant grew at a rapid pace. Sturtevant's population grew by 39 percent between 1990 and 2000, while Mount Pleasant (15 percent) and Caledonia (12 percent) also experienced impressive gains. With high property taxes, aging real estate and infrastructure base, and high crime rates, Racine found itself at a competitive disadvantage to these municipalities in terms of attracting high-value commercial and residential development. By 1998, even the poorest community in eastern Racine County had a per capita equalized property value that was 73 percent higher than that of Racine.

Yet even as its economic vitality declined, Racine continued to provide infrastructure and amenities enjoyed by the entire area. Growth in the surrounding municipalities was supported by Racine's policy of extending water and sewer infrastructure without requiring annexation to the city. Racine was also providing approximately $1.3 million in annual funding to the Racine Public Library, the Racine Zoological Gardens, and the Wustum Museum of Fine Arts--facilities that are enjoyed free of charge by all county residents. In summary, the city of Racine was shouldering the financial burden for almost all of the "quality of life" institutions in eastern Racine County. However, the city's ability to fund these facilities through increased residential, commercial, and industrial taxes was severely limited. Not only that, but its generous policy of extending sewer and water service without annexation was feeding the growth of the very suburbs it was competing with for much-needed tax base. These circumstances set the stage for consideration of a revolutionary approach to regional cooperation.

REGIONAL REVENUE SHARING

Unlike most other metropolitan areas experiencing central city decline, eastern Racine County turned to regional revenue sharing as a key to reduce competition and disparities and foster interregional cooperation. Intermunicipal revenue sharing plans, although not common, have been implemented in other places throughout the United States. Of the existing large-scale programs, only four involve the sharing of property tax revenues, as opposed to sales taxes, income taxes, or occupational license fees. Only two of the four, the Minneapolis-St. Paul Fiscal Disparities Program and the Hackensack Meadowlands Program, are of significant scope in terms of the number of participants and the amount of revenues being shared.

Created in 1971 by the Minneapolis Fiscal Disparities Act (Minnesota Statutes, Chapter 473F), the Minneapolis-St. Paul program is the largest revenue sharing program in the country, covering seven counties and 300 local governments. The intent of the program is to reduce fiscal disparities by redistributing property tax revenues from communities with high property value per capita to communities with low property value per capita. However, the formula used for this program sometimes results in redistribution in the opposite direction--from poor communities to wealthy communities. These inconsistencies are well documented.

The Hackensack Meadowlands Program was created to help manage development in 14 municipalities that are a part of the Hackensack Meadowlands in New Jersey, a district with important wetlands (P.L.1968, c.404.). The intent was to protect wetlands by reducing competition for new development. Since the program's inception in 1970, approximately 40 percent of the revenues from any new development have been shared. The program is not intended to equalize fiscal capacity.

The revenue sharing plan developed for eastern Racine County is significantly different than any of the other major property tax revenue sharing programs in the country. It was adopted voluntarily by local governments rather than by legislative directive. It involves significant transfers of tax revenues for the purpose of equalizing fiscal capacity. Unlike the Minnesota model, it was designed to always transfer revenues from high fiscal capacity communities to low fiscal capacity communities. Finally, it was developed within the context of a comprehensive intermunicipal agreement that addressed all of the major issues of the communities involved. Resolving the fiscal capacity disparities paved the way for cooperative discussions on a variety of other topics.

WASTEWATER--THE COOPERATION CATALYST

The catalyst for revolutionary changes in regional cooperation in Racine proved to be one of the most basic of municipal services--wastewater treatment. For obvious reasons, wastewater treatment is essential to the area's growth and quality of life. By 1997, however, the city's wastewater treatment facility, which provides sewer service to the surrounding communities, was nearing full capacity and Racine had begun facility planning. The resulting plan showed that the facility was in need of major upgrades and expansion, estimated to be in the range of $81 million. Some of the proposed improvements involved the system's inability to handle wastewater flows, which occasionally spilled into Lake Michigan during major storms. In addition, some of the equipment was nearing the end of its useful life, and the treatment processes needed to be updated to improve the quality of the wastewater effluent. Altogether, the upgrades needed to accommodate existing customers accounted for about 30 percent of the total project costs.

The majority of the improvements were needed to accommodate the growth of the suburbs. Almost 70 percent of the project costs, including improvements to major interceptor sewers, are for increasing the facility's capacity so that it can handle anticipated growth through the year 2020. Without these system upgrades, the Village of Sturtevant and the towns of Caledonia, Mount Pleasant, Yorkville, and Raymond would have restricted residential, commercial, and industrial growth.

Initially, Racine hired an attorney and a multidisciplinary municipal engineering and consulting firm with experience in developing intermunicipal agreements to negotiate a wastewater service agreement. These experts found that a continuation of past arrangements for wastewater service to the outlying communities would end up costing Racine's utility customers more than their fair share for sewer service. Furthermore, by providing sewer service to the suburbs, the city was facilitating economic growth in those communities at its own expense. It was clear that Racine needed to find a new solution to the broader problem of inequity in service provision between itself and its neighbors, and that the solution would have to be in place before sewer service were extended any further.

Negotiations over the wastewater treatment facility expansion started more than five years ago. To say that the negotiations were contentious at first would be an understatement. The stakes were high, and each of the parties brought to the table a list of contentious issues that transcended the question of how to pay for the wastewater treatment facility. As the discussions progressed, it became clear that either the communities would devise a cooperative strategy or they would all suffer the consequences.

The county executive called together the heads of the area governments and the executive director of the Southeastern Wisconsin Regional Planning Commission for monthly meetings with the engineering consultant to discuss and resolve the many issues between Racine and its neighbors. Each party had the opportunity to raise topics for the group to consider. If an existing condition or cost sharing practice was thought to be inequitable by one of the communities, the consultant would study and document the facts relative to the actual cost and use of the service and what portion was being paid for by each party. While the needs and goals of individual communities were brought to the table, there was a growing recognition that the future of the entire region depended on finding an equitable solution for everyone.

The first order of business was to develop a fair way to allocate the costs of the wastewater treatment facility upgrade and expansion. In the past, as is common practice throughout the country, the utility simply included capital costs for the wastewater treatment facility in its annual sewer user charges billed to the outlying communities. Since the amount of user charges billed to each community depends on the community's share of the total volume of sewage, capital costs were paid for in proportion to the percentage of current wastewater flows. If the costs of the planned upgrade and expansion were paid for through user charges, Racine, which accounts for approximately 64 percent of the wastewater flows, would have carried 64 percent of the annual costs until new growth took place in the suburbs. However, almost 70 percent of the costs are for expanding the facility to accommodate future increases in flows, only 8 percent of which will be generated in Racine. Recovering the costs of expanding the facility through user charges would have resulted in Racine customers carrying the cost of new capacity created to serve growth in the suburbs.

Instead, the plan called for each community to purchase capacity rights in the wastewater treatment facility and to pay up front for their share of the capital costs. To allocate costs to the various municipalities, the project costs were categorized as either upgrade costs or expansion costs. Upgrade costs were to be paid for through the user charge, while expansion costs were allocated on the basis of future increases in wastewater flows and paid for directly by the communities requiring the extra capacity. This concept of purchasing capacity rights to the wastewater treatment facility gained acceptance relatively quickly.

THE RACINE MODEL

As discussions progressed, it became clear that there were other issues that needed to be resolved, most importantly the fiscal inequities and competition between Racine and its suburbs. The heads of these governments ultimately decided to take intergovernmental cooperation a step further and develop a regional revenue sharing plan for the Racine area. The group identified several problems among the communities in eastern Racine County that could be addressed by revenue sharing, and laid out the following goals for the property tax revenue sharing program:

* Sharing of commercial and industrial tax base

* Transfers of revenue generally from high fiscal capacity communities to low fiscal capacity communities

* Reduction of the disparities in property tax rates

* Less competition among neighboring communities for certain types of economic activity

* Fewer annexation disputes

None of the existing revenue sharing programs the group studied could meet all of these objectives. However, these programs and the academic literature offered lessons and ideas that were incorporated into a workable plan for the Racine area.

The plan that evolved included two components, each with a different yet complimentary purpose. First, the program improves cooperation and curtails annexation disputes in the area by reducing competition for new development among the participating municipalities. When one of the municipalities receives new commercial or industrial development, a portion of the property tax revenues from that new development is shared with the other municipalities. Second, the program serves to strengthen the financial health of the area and equalize the tax base per capita, or fiscal capacity, by distributing property tax revenues more evenly among area municipalities.

The program requires that all participating municipalities contribute a portion of their industrial and commercial property tax base to a shared pool. As the first step in calculating revenue sharing payments, each community contributes a percentage of its 1999 commercial and industrial tax base and a percentage of the increase in its commercial and industrial tax base since 1999. In the second step, each community contributes an additional share of its tax base to the pool or receives a distribution from the pool based on its relative fiscal capacity.

Communities with a fiscal capacity higher than the weighted average of the participating municipalities contribute additional tax base to the pool, while communities with a lower than average fiscal capacity receive a distribution of tax base from the shared pool. Each community's new effective tax rate, taking into account the amount of tax base shared, is then applied to its net contribution to, or distribution from, the shared tax base pool to determine the amount of revenues that the community receives from or pays into the pool. The total payments into the pool equal the total amount paid out, so the revenue sharing plan is entirely self-financing. Exhibit 1 illustrates the revenue sharing model, while Exhibit 2 shows the impact of 2003 revenue sharing payments.

The intercommunity cooperation agreement is structured so that growth pays for growth, rather than having the residents of Racine shoulder the financial responsibility for suburban expansion. Each of the communities outside the central city has purchased future capacity at the wastewater treatment facility. Mount Pleasant expects to have the most future growth, and has purchased rights to almost 30 percent of the total capacity of the upgraded and expanded facility.

An additional piece of the intermunicipal agreement was a provision to compensate Racine for services related to the zoo, museum, and library. The revenue used to make payments to the city for these cultural facilities comes from surplus income generated by the wastewater utility. Arguably, this is revenue that belongs to the utility. However, within the framework of intermunicipal cooperation, it was agreed that a portion of these funds would be returned to the city for the library, zoo, and art museum. Racine County has begun to increase its funding level for these services, further reducing the inequities in the funding arrangements.

The revenue sharing income is designated for rebuilding aging infrastructure and restoring brownfield sites in Racine without compromising social welfare programs or other city services. The long-term goal is to increase Racine's tax base, which will lower taxes in the city and reduce the tax base sharing payments from the surrounding communities.

In order to meet the needs of the towns of Caledonia and Mount Pleasant, two of the most populous towns in Wisconsin, Racine agreed to boundary adjustments with each of the communities. The city also agreed to support their applications to the State of Wisconsin for incorporation as cities or villages. Under Wisconsin law, it would be very difficult, if not impossible, for either of these towns to incorporate over the objections of Racine.

A VISION FOR THE FUTURE

Work on the first phase of the wastewater treatment facility began in 2002. Phase 2, the full-blown expansion, began in early 2003. Mount Pleasant's petition for incorporation was granted on June 6, 2003. A referendum passed on September 9, 2003, and a new Mount Pleasant Village Board was elected on November 4, 2003. The Town of Caledonia is now holding informational meetings on future incorporation. The City of Racine has formed several task forces to allocate the new shared revenues. Some of the money, however, is already earmarked for specific projects. For example, $6 million of the revenues coming from the Village of Mount Pleasant will be spent in a joint impact zone on the RacineMount Pleasant border.

Infrastructure will be built, business and residential development will occur, and the population of eastern Racine County will rise. But the real story is the extraordinary effort that was put forth to accomplish these feats without the all too common political backbiting and contentious legal maneuvering that has become part of the fabric of regional issues. Everyone involved in this five-year process made sacrifices and compromises. But the shared vision that eastern Racine County could function together as a desirable place to live, work, and play became the overriding factor. The area was recently named one of 10 All-America Cities for 2003, and the sewer agreement was cited as a major factor in the judges' decision. The nation will be watching as this new revenue sharing agreement unfolds.

Exhibit 2: Impact of 2003 Revenue Sharing Payments

Municipality                    Payment    Equalized Value    Tax Rate
                                                             Impact (2)

Town of Caledonia (1)          -$194,810    $1,484,597,400     $0.13
Town of Mount Pleasant (1)     -$628,201    $1,738,188,700     $0.36
Villas Elmwood Park              -$2,740       $33,930,200     $0.08
Village of Wind Point           -$48,932      $197,649,100     $0.25
Town of Raymond                 -$18,446      $294,410,200     $0.06
Town of Yorkville               -%32,938      $279,851,900     $0.12
Village of Sturtevant (1)       -$84,160      $275,204,100     $0.31
Village of North Bay             -$7,751       $25,763,300     $0.30
Town of Somers (1)               +$1,455      $512,206,800     $0.00
City of Racine (1)           +$1,016,523    $2,882,582,300     $0.35

(1.) Parties that have signed the Revenue Sharing Agreement.

(2.) Expressed in terms of a rate per $1,000 of equalized
property value.

Note:

(1.) David Y. Miller, The Regional Governing of Metropolitan America (Boulder, Colorado: Westview Press, 2002): 4.

JAMES M. FIACCO and CHRISTINE A. CRAMER are financial analysts for Ruekert & Mielke, Inc., a multidisciplinary municipal engineering and consulting firm located in Waukesha, Wisconsin.

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