Milwaukee pension debt clouds Wisconsin’s otherwise positive retirement system picture
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Commentary

Milwaukee pension debt clouds Wisconsin’s otherwise positive retirement system picture

Although Wisconsin has one of the nation’s best-funded and most resilient public pension systems, these qualities do not extend to the state’s largest county and city.

Although Wisconsin has one of the nation’s best-funded and most resilient public pension systems, these qualities do not extend to the state’s largest county and city. The Wisconsin Retirement System (WRS) does not cover public employees in the city of Milwaukee or in Milwaukee County, and both of those local governments are now struggling with the effects of public pension underfunding.

As Reason Foundation previously reported, Wisconsin consolidated most of its local and state plans into a single pension system decades ago and then implemented substantial retirement reforms in 2011. But even before those public pension reforms, WRS benefited from a lack of political interference and a shared risk model that allowed the retirement system to reduce benefits in the event of severe portfolio investment losses—like those seen during the economic downturn of 2008. As a result, the Wisconsin Retirement System is fully funded.

City of Milwaukee

The city of Milwaukee has followed a much different path than the Wisconsin Retirement System. According to its most recent actuarial valuation report, the City of Milwaukee Employes’ (sic) Retirement System (CMERS) was 80.7% funded and had unfunded liabilities of $1.3 billion at the beginning of 2021. Although the public pension system realized good investment returns in the 2020 calendar year, the system made little progress in reducing its underfunding because employer contributions were below actuarially determined levels—meaning the city government failed to put enough dollars into the pension plan to improve funding.

To maintain budget stability, Milwaukee has a longstanding policy of changing employer contribution rates only once every five years. The next contribution rate reset is scheduled for 2023. At that time, the required contribution is expected to double from 2022 levels, putting a significant dent in the city’s budget. As a mayoral task force on Milwaukee pensions recently reported:

In 2023, based on the latest actuarial valuations, the City of Milwaukee’s required annual pension funding contribution is projected to grow from approximately $71 million to over $145 million. That amount is 17% of the city’s entire 2021 tax levy supported budget, and 48% of the city’s 2021 property tax levy. This potential doubling of the expense comes at a time when the city and numerous third-party analysts agree that the city’s revenue structure is inadequate to meet both needed city service levels and fund future pension obligations.

The Milwaukee City Council is responding by reserving funds in the 2022 budget for contributions in future years. Milwaukee has the financial flexibility to reserve these funds because of federal aid under the American Rescue Plan Act (ARPA). For example, on Nov. 5, the City Council adopted a budget amendment which read as follows:

Increase the deposit to the Employers’ Pension Reserve Fund in 2022 by $6.4 million. Offset by increasing the police department’s ARPA allocation.

This language seems to be a workaround to a congressional restriction on the use of ARPA funds to make payments to public pension funds. In this case, Milwaukee is diverting its own source revenue from the police budget to a pension reserve and then backfilling the police budget with ARPA funds.

Because the city is receiving its $394 million of ARPA funding in two tranches—half in 2021 and half in 2022—it should be able to take similar measures next year, further cushioning the 2023 budgetary blow.

Milwaukee County

The surrounding county is also struggling with pension underfunding. According to its most recent actuarial report, the Milwaukee County Employees’ Retirement System (ERS) had a funded ratio of 75.3% and unfunded liabilities of $569 million. The county also has separate retirement plans for mass transit employees and temporary employees, but these plans have relatively small unfunded liabilities.

Milwaukee County ERS’ liabilities grew, in part, because the county did not make its full actuarially determined contributions between 2012 and 2016, according to its most recent Annual Comprehensive Financial Report. During that five-year period, the county’s contributions fell $12 million short of recommended levels.

Since 2015, Milwaukee County’s contributions to ERS have tripled from $19 million to $57 million, as it began to meet and then exceed actuarial recommendations. These contributions exclude debt service the county pays on pension obligation bonds it issued in 2009 and 2013.

Writing for Urban Milwaukee, Bruce Murphy attributes much of Milwaukee County’s pension challenge to benefit enhancements provided to non-represented employees in 2000 and unionized workers in 2001. Among the enhancements was the option for employees to receive large lump sum payments, known as backdrops, in exchange for working beyond the date on which they were eligible to retire and taking slightly reduced monthly payments. All employees saw increases in their pension formula (getting 2% of their final average salary per year of service rather than 1.5%) or a 25% pension “bonus” depending on their hire date. When these enhancements were implemented, their actuarial impact does not seem to have been offset by increased contributions.

The failure to properly fund these public pension benefit enhancements is partially attributable to a flawed actuarial analysis conducted in the early 2000s. Mercer, the county’s actuarial consultant at the time, estimated the present value of the changes at $75 million. Several years later, ERS found that the actual cost was closer to $200 million and filed suit against Mercer. The firm settled the lawsuit in 2009 for $45 million.

The rising public pension contributions seem to be crowding out spending on other county services. Bruce Murphy further connects the pension issue to reduced park staffing as well as deteriorating trails, basketball courts, parking lots, and other park infrastructure. He also attributes reduced bus service to pension cost pressures.

The Way Forward

Despite the outstanding example of responsible public pension stewardship at the state level, Milwaukee’s city and county pension systems remain underfunded and are pulling funds from other public priorities. Perhaps the best way to extend the Wisconsin Retirement System’s success to Milwaukee is for the city and county plans to merge with the statewide system, thereby completing the process of consolidation.

If consolidation were to be pursued, the biggest question would be who would bear the burden of covering the unfunded liabilities in the county and city systems, which totaled $1.9 billion at the beginning of 2021 and would likely increase once re-estimated using WRS actuarial assumptions.

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