Madison finance staff outline 2026 ‘cost to continue’ budget gap; investment income cushions 2024 results

Director Schmidicki presented the update to the Finance Committee of the City of Madison on June 23, outlining 2024 year‑end results, a preliminary 2025 outlook and a cost‑to‑continue projection for 2026 that leaves an initial budget gap of about $6.2 million.

Schmidicki said the city’s net position for governmental and business‑type activities was roughly $2.1 billion at Dec. 31, 2024, up about $246 million from 2023, and that the enterprise funds’ net position was about $1.1 billion. He told the committee the unassigned general fund balance finished “just under $111,000,000, just up about $28,000,000 from 2023,” or roughly 27% of the 2025 budget.

Why it matters: high investment earnings and underspending because of vacancies boosted reserves in 2024, improving near‑term flexibility. But Schmidicki warned that much of that cushion is one‑time money; the city’s five‑year outlook projects spending gaps in later years and anticipates using fund balance to smooth near‑term shortfalls while considering permanent revenue options such as special charges.

Key facts and figures - Unassigned general fund balance: about $111,000,000 (≈27% of the 2025 budget). (Schmidicki) - Total governmental fund balances: $379,000,000. (Schmidicki) - City net position (primary government): ~$2.1 billion; enterprise funds: ~$1.1 billion. (Schmidicki) - Net general obligation debt: ~$681,000,000; total debt: ~$928,000,000. (Schmidicki) - 2024 revenues finished about 6% above budget, driven largely by investment income (about $18 million above budget). (Schmidicki) - Preliminary 2026 cost‑to‑continue expenditures: approximately $456,000,000 (about 5.5% above the 2025 adopted budget); estimated 2026 revenue: about $450,000,000, leaving a gap near $6.2 million. (Schmidicki)

What drove 2024 results Schmidicki attributed most of the 2024 improvement to higher investment earnings after the Federal Reserve’s rate increases: “interest rates averaged about 3.8% in 2023 and 4.4 percent in 2024” for the city’s cash pool, and mark‑to‑market adjustments moved from a loss in 2022 to net positives in 2023–24. He said the city has set aside $5 million of assigned fund balance to offset future large drops in mark‑to‑market value.

On the expenditure side, general fund spending ended roughly $8 million below final budget, largely because of vacancy‑driven salary savings and lower miscellaneous appropriations. Schmidicki noted one timing anomaly: some ARPA costs were charged to the grants fund rather than the general fund, reducing 2024 general fund spending.

2026 outlook and cost‑to‑continue Schmidicki described the 2026 process as a “cost to continue” exercise: agencies will submit budgets that reflect the cost of maintaining current service levels, with limited supplemental requests. Highlights: - Personnel costs drive the increase: roughly $24 million of the cost‑to‑continue increase is salary and benefits. Schmidicki said the estimate assumes a 3% increase for general municipal employees, negotiated increases for protected services, step and longevity adjustments, a placeholder 11.5% increase for health insurance and a 5% placeholder for Wisconsin Retirement System costs. - Transit subsidy: Metro’s general fund subsidy is projected to rise to about $25 million in 2026, reflecting lower federal pandemic aid and slower fare recovery. - One‑time funds removed: ARPA support for homeless services in 2024 was not repeated, increasing 2026 base needs. - New costs: two additional elections in 2026 are budgeted at just under $700,000 for staffing and services.

Schmidicki noted the state Expenditure Restraint Program (ERIP) provides about $7 million if the city limits its general fund spending growth below a specified threshold; the current cost‑to‑continue exceeds that threshold, so staff will consider adjustments in the executive and final budgets to preserve ERIP eligibility. He told the committee: “bottom line here is that cost to continue is more than what we're able to do to qualify for ERIP. We'll have to make some changes in the executive and final 2026 budget.”

Questions from alderpersons Committee members asked whether higher‑than‑expected 2024 investment income could reduce the need for special charges in 2027. Schmidicki said the five‑year outlook shown was last year’s and will be updated; he cautioned that fund balance is a one‑time resource and that structural gaps may remain. On compensation, Schmidicki said the city’s compensation study has encountered delays and is not expected to meaningfully inform the 2026 baseline; any changes would likely be phased over multiple budgets.

Procedure and next steps Schmidicki reviewed the 2026 calendar: operating budget requests due mid‑July, agency briefings in mid‑August, capital introduction in early September, operating introduction in early October, finance committee amendment days in September and October, and council adoption in November. Staff will return with midyear projections on July 22 and updated five‑year outlook numbers later in July or August.

Ending The committee did not take formal votes on the 2026 guidance at the June 23 meeting; members directed staff to update projections and return with additional detail at the July meeting and through the August briefing schedule.