CHICAGO — Milwaukee County officials are hoping Wisconsin lawmakers act soon on a bill that would pave the way for a bond issue to eliminate an estimated $330 million unfunded pension liability that is straining county coffers because of rapidly growing annual payments.
The bill has bipartisan support, having recently cleared a Senate committee by a unanimous vote and an Assembly committee in an eight-to-one vote. The Senate is controlled by Democrats and the Assembly by Republicans, while Gov. Jim Doyle is a Democrat and Milwaukee County Executive Scott Walker — who initially proposed the borrowing plan four years ago — is a Republican.
“We are hopeful that the bill will be acted on prior to the end of the legislative session in March, depending on when the legislative leadership calls it up,” said Steve Cady, the county board’s fiscal and budget analyst. The identical bills are numbered 666 in the Assembly and 366 in the Senate.
Under the bill, the county would receive approval to extend to 30 years the final maturity on the bonds for the purpose of paying down its unfunded pension liability. Current state laws limit the county to a 20-year maturity. The county could issue bonds to fund a portion or all of its unfunded liability, which is estimated at $329 million. The figure could change based on a 2007 actuarial review not yet published.
“That report this spring will help us true up what is the full liability,” Cady said. Additional structural details are still to be worked out pending the bill’s approval. Milwaukee County so far has worked on the proposed plan with financial adviser Public Financial Management Inc. and bond counsel Chapman and Cutler LLP.Doyle is expected to sign the bill if it passes. He named a special task force in June 2006 to review the county’s pension situation and to recommend what state changes were needed to help it shore up the system. The task force recommended early last year that the county receive authority to issue 30-year pension obligation bonds.
The report also suggested that the county outline a five-year plan for improving its financial state. Aside from enacting legislation to permit the POB sale, options for helping the county included providing more state aid for some services.
The county board also will have to approve the financing. Some members have raised concerns over the risk associated with taking on debt to pay off another debt, one that requires a certain level of investment earnings to work in the county’s favor. Supporters have argued that the city of Milwaukee and the state have taken similar steps in recent years to address their unfunded pension liabilities.
A working group made up of various legislative, county board, and county administration officials would finalize a borrowing plan and conduct a competitive search for underwriters if the bill wins approval. The deal’s possible timing will ultimately depend on interest rates.
“We will have to assess the market,” Cady said.
Under the preliminary proposals, the restructuring would trim about $90 million off Milwaukee County’s costs of amortizing its unfunded pension liability. That figure is based the assumption that the county could borrow at an interest rate of about 6% and garner investment returns of 8%. Its annual debt service payment would be $21 million. Under the bill, the county would establish a reserve to help cover unexpected pension costs in the future, and the state could cut its aid to the county if it fails to make its full annual required contribution to the pension fund.
The county’s $1.3 billion 2008 budget anticipates about $10 million in savings from the deal to reduce its annual payment to about $39 million. The county’s pension fund is funded at only about 70%, and without any action annual payments will rise steeply.
Moody’s Investors Service cited the escalating pension costs as a factor in its decision in 2006 to assign a negative outlook to the credit. Moody’s rates Milwaukee County Aa3, while Fitch Ratings and Standard & Poor’s rate it AA.
The liability has skyrocketed in large part because of a series of enhanced pension benefits approved in 2001 by the board and former county executive F. Thomas Ament, which prompted a wave of early retirements. Prior to 2000, the plan was fully funded and did not require an annual contribution.
Separately, the county faces an unfunded liability of $1.4 billion for other post-employment benefits, such as health care. The looming OPEB burden prompted the Wisconsin Policy Research Institute in a report in 2006 to warn that Milwaukee County faced a fiscal crisis if its pension problems were left unchecked.