CHICAGO — Milwaukee takes bids Tuesday on $62 million of taxable general obligation promissory notes that will put the city on a path toward reducing interest charges on its annual pension payments while eliminating volatility in the size of annual payments, according to comptroller Martin Matson.

The notes mature in February 2018. Public Financial Management Inc. is advising the city and Katten Muchin Rosenman LLP and Hurtado SC are co-bond counsel, said the comptroller public debt specialist Richard Li.

The state typically makes it annual payment in the arrears to the City Employees’ Retirement System, incurring an 8.25% interest charge. The city made its 2013 payment — ahead of the Jan. 1, 2014 due date — last month. It funded the payment by issuing short-term commercial paper and the note proceeds will retire that paper.

The city anticipates the annual interest costs of the taxable note borrowing at about $1 million, resulting in a net benefit to city coffers of $4 million given the higher interest charge imposed by the pension fund.

The note issue is part of the city’s larger plan to shift to a new funding model designed to protect the system’s strengths but also guard against wide fluctuations in annual payment amounts that complicate fiscal planning.

The city’s Common Council adopted the change this spring after discussions with ERS over the last two years through a special pension task force. Under the plan, the city is shifting from an actuarially required contribution to a stable contribution policy. The annual amount will still be based on actuarial calculations and reviewed every five years.

“The SCP, as determined by the actuary, eliminates volatile swings in the actuarially required contribution from year-to-year,” reads the offering statement on the upcoming sale. “The SCP is based upon a percentage of payroll, and will be reviewed and reset every five years.”

“It provides a predicable payment for the city for the five years,” Matson added.

A key to the new funding plan is the elimination of the current policy which calls for no city contribution in years when the plan is fully funded. The city will now know the amount of the payment heading into each new year so it can pay it earlier than normal and save on the accrued interest now incurred by paying in the arrears.

The ERS was healthy at a 96% funded ratio for 2011. The city made no payments between 2006 and 2008 when the system hit a full funded ratio, and then $61 million in 2009, $1.5 million in 2010, and $31 million in 2011.

The city will continue on the same annual course through 2017 by making next year’s payment ahead of the due date by tapping the amount it would have set aside in the current budget. The city will retire the notes with funds it would have set aside for its 2018 payment.

“The city will review the program in 2018 and decide whether to renew it,” Matson said. The city could again borrow or shift back to making the payment in the arrears.

Moody’s Investors Service rates the notes Aa2 and Standard & Poor’s rates them AA, both based on the full faith and credit pledge of the city. The city has $983 million of GO debt, including the new offering.

The rating “reflects the city’s long standing role as an economic engine for the state of Wisconsin tax base that remains sizeable despite continued valuation declines; weak socio-economic indices; improved general fund performance and position; and adequately funded pension plans,” Moody’s wrote.

The rating further reflects alternate liquidity available for GO debt service through a special fund and an increasingly complex debt program, for which internal policies and procedures have recently been developed, Moody’s added.

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