Milwaukee County Seeks Help for Troubled Pension System

Commentary

Milwaukee County Seeks Help for Troubled Pension System

While the Dallas Police and Fire Pension System could arguably be the most striking example of local pension mismanagement of late, it is hardly the only one. For years, Milwaukee County’s Employees’ Retirement System (MCERS) has significantly miscalculated the cost of retirement benefits and recorded inferior investment returns. From 2014 to 2016 alone County budgetary costs associated with MCERS rose roughly from $29 million to $60 million. County officials now attempting to address the situation are proposing to hand the hobbling plan to the Wisconsin Retirement System.

Let’s review how Milwaukee County got here.

To start, after several decades of amendments to the benefit structure MCERS has grown overly complicated, with 180 different retirement options.

Next, several years of accounting errors have perpetuated an already problematic funding ratio. In fact, just recently, MCERS officials discovered that 850 county retirees have been getting the wrong amount — either an underpayment or overpayment — because of a misapplied mortality table.

This was one of the first things that County Supervisor Sheldon Wasserman learned upon starting the job as a vice-chair of the county board Finance Committee. In the last year alone, MCERS has had to pay out $11 million in catch-up payments to almost 1,300 retirees who received short checks that had to be reimbursed with interest.

Perhaps worse than this administrative error is that MCERS has become exposed to a combination of inadequate investment returns, dubious funding practices, and outdated actuarial assumptions. For example, over the last decade (i.e. 2006-15), the system maintained an unrealistic 8% investment return target, even though its returns averaged out to 5.9% (geometric mean) during the same time period. For the record, today only 7% of public sector plans use discount rates as high as 8% or greater.

The MCERS plan also spreads its investment gains and losses over an unusually long 10-year period, and uses an outdated UP-1994 mortality table. These practices alone can be significantly overstating assets and understating actual costs of the plan.

As a remedy, Supervisor Wasserman recently asked the County Board to authorize a feasibility study on transferring management authority of MCERS to the Wisconsin Retirement System. (All other counties in Wisconsin are part of the state retirement system.) The board rejected the idea, preferring to focus on preventing future pension mistakes instead.

As simple as it may sound, the state takeover idea may become a cumbersome endeavor. Having the state take on MCERS would likely mean restructuring the pension options, a practice that might lead to legal challenges on constitutional grounds. (A local ordinance allows the County to freely alter the retirement system — except benefits of vested members.)

Still, it might be worth the hassle get MCERS fixed to secure already promised pensions.

While Dallas Police and Fire Pension System is clearly in a worse fiscal position today, the two plans share some problematic elements. Both plans can bypass legislative approvals of benefit changes, and offer structurally unsound post-retirement benefit programs. Procedurally, both have pension boards clinging to status quo policies, and yet, even Dallas’s plan might still be mended.

With all of these issues piling up — including over $490 million in unfunded liabilities — the malfunctioning MCERS requires significant reforms. Giving the management authority to the state retirement system may not be the answer, but something needs to be done before the problems get too expensive to fix.

Anil Niraula is a policy analyst at Reason Foundation.