Milwaukee pension change a good step, Moody's says
Milwaukee’s move to lower its assumed rate of investment return on its pension system received an endorsement from Moody’s Investors Service.
The assumed rate of return, which also doubles as the reported discount rate that is a key factor in actuarial valuation, was lowered to 7.50% from 8.24% in the Employees' Retirement System’s recently published actuarial valuation report.
It was at 8.50% in 2016, a rate far above most public pension plans.
Moody’s called the adjustment a “credit positive for the city of Milwaukee because it will likely lead to stronger pension contributions by the city and lower the risk of consistent investment underperformance.” Moody’s rates the city’s general obligation debt A1 with a stable outlook. “Milwaukee's annual pension funding benchmarks will be far more comparable to those of most state and local governments.”
Under the city's contribution policies, the payment rates are set once every five years. The city is currently scheduled to next reset contribution rates in 2023.
“The level of annual underfunding made apparent by ERS' revised assumptions increases the likelihood that Milwaukee will increase its pension contributions materially beginning in 2023, if not earlier. All else being equal, higher contributions will result in lower adjusted net pension liabilities compared with a continuation of the status quo,” Moody’s said. The ANPL is a figure compiled by Moody’s based on various actuarial factors.
Moody’s puts the city’s ANLP at 373% of operating revenue making it a key credit challenge. “One driver of the high ANPL is lower asset buildup from consistently low pension contributions, directly attributable to the use of high reported discount rates to set contribution targets,” Moody’s said.
Milwaukee has a record of setting contributions at an actuarially determined contribution level, or ADC, which is favorable, but that funding benchmark was based on the high discount rate so fell short of reflecting a truly healthy contribution level.
“Based on the recently released ERS actuarial valuation, the city's scheduled contributions for 2019 will fall below its ADC and our tread water indicator by roughly 50%, due to the system's revised discount rate and 2018 investment losses,” Moody’s said. “Whether the city will consider increasing its contributions any sooner is currently uncertain, but we expect it will materially increase contributions no later than 2023.”