David Michael Miller
The Madison Water Utility pays a larger PILOT fee than any other revenue-generating city entity.
David Ahrens thinks that Madison’s government has an addiction.
The city, he says, is hooked on a little known tax called a “payment in lieu of taxes,” or PILOT.
These are fees that government and quasi-government bodies, which are technically exempt from property taxes, pay the city in exchange for services the city provides.
But Ahrens, a former Common Council member, has always been troubled by which agencies pay what. For instance, the city charges the Monona Terrace convention center just over $338,000 a year. But it charges the Madison Water Utility — which provides a vital resource to residents — $7.5 million a year. That amount, which is passed on to the utility’s customers, is more than 15 percent of the utility’s $45 million budget.
“Can you think of something that’s more regressive than a tax on water?” Ahrens asks.
Madison also collects what are known as “intergovernmental revenues” from the state of Wisconsin in exchange for services provided to the many state buildings and facilities located in the capital city. The state has hundreds of properties in Madison, currently estimated to be worth more than $6.6 billion.
But for state-owned properties, the city is largely at the mercy of what the state is willing to pay. In 2020, the city expects to get $8.3 million from the state for “payment for municipal services.”
PILOT fees are charged to the city’s own revenue-generating entities: The water utility, the parking utility, the Community Development Authority (which oversees the city’s public housing properties), the city-owned golf courses and Monona Terrace.
The city will charge these entities a combined $10 million in PILOT fees next year.
“The water utility is by far the largest,” says David Schmiedicke, the city’s finance director. The state’s Public Service Commission created a formula for determining what cities can charge water utilities, Schmiedicke says. But it starts by determining how much the utility is worth. “If they were a business, what would the value of their business,” he says.
But he adds that the city can charge less than what the PSC determines as the maximum rate.
The parking utility contributes the second highest amount in PILOT fees, at $3.9 million. The city’s golf courses contribute the lowest amount, at $175,000.
The city’s hotel room tax, which generates $25 million a year, is also technically considered a PILOT. But it is a fee added on to hotel customers’ bills, not a charge to a city agency. And by state law, 70 percent of the revenue must be spent to promote tourism. There are also 16 nonprofit agencies and churches that pay a voluntary PILOT, which adds up to about $930,000 a year.
Ahrens sees value in having a PILOT fee for some city agencies, but sees it as a sneaky way of raising city revenue. And that’s particularly problematic for an agency that’s providing an essential resource like water. Residents are already paying for the cost of providing water through their utility bills. But through the PILOT, the city assesses an extra fee, essentially making water more expensive.
“If you looked at historically what’s happened to PILOT fees in a period of 10 years, it’s gone up much faster than property taxes,” Ahrens says. “And bureaucratically, how could the water utility appeal its own assessment against the city? That wouldn’t happen.”
The utility has struggled financially in recent years, facing a $6 million operating deficit in 2018 that the city ended up having to cover from its general fund. Later that year, the utility raised rates by 30 percent.
Ald. Mike Verveer acknowledges the ugly optics of charging the PILOT. “I very much understand the argument that folks are being taxed twice,” he says. “But we’re on legal ground and there’s a rational basis for this.”
He says the city doesn’t really have much choice.
“Unfortunately, this is one of the tools we in city hall feel need to use because of the very strict levy limits we’ve been under for several years,” he says. “It would make balancing budgets very difficult if PILOTs went away. I don’t know how we could do it…. We’ve clearly become dependent on these PILOTs.”
