CHICAGO - Wisconsin's largest local governments face a collective $6 billion unfunded liability for retiree health care benefits, with Milwaukee-area governments and school districts representing about $4.5 billion of the total, according to a new study from a local government policy watchdog group.

The report - Government Retiree Health Benefits: Wisconsin's Ticking Time Bomb, from the Wisconsin Policy Research Institute - warns of the risk the other post-employment liabilities pose to taxpayers if action is put off.

"When elected officials decide to short their annual OPEB liabilities, they are making a direct and conscious decision to leave future taxpayers with more debt ... Until fiscal responsibility actually becomes an issue with which taxpayers judge their elected officials, this cycle will likely continue - until taxes soar to finally pay off the liabilities," the report reads. "Right now, local governments are essentially engaging in subprime mortgage financing - and the bill is coming due."

The report looked at the 27 local governmental units with budgets of more than $100 million who under new Government Accounting Standards Boards rules must report this year on an actuarial basis the current and future costs of health care and other non-pension retiree benefits.

Smaller governments face deadlines over the next two years to report their unfunded liability. Previously, governments were only required to report the cost on an annual, pay-as-you-go basis. Governmental units are also required under the new rule to calculate the annual required contribution it would take to fully fund their liability although no action is required on a government's part to meet the ARC or to begin addressing the total liability.

The largest liabilities face governments and school districts in southeastern Wisconsin with the largest liability, $2.2 billion, reported by the Milwaukee Public Schools. Milwaukee County follows with a $1.5 billion liability, the city of Milwaukee with a $806 million liability, the city of Racine with a $314 million liability, and Racine County with a $253 million liability. The Kenosha School District has a $241 liability followed by the Waukesha School District with a $195 million liability and the Racine Unified School District with a $105 million liability.

Racine and Kenosha are located just south of Milwaukee and Waukesha is a suburb of Milwaukee. The other governments and districts in the study, with budgets of at least $100 million, each report liabilities of less than $50 million.

In its review of Milwaukee Public Schools, the report notes that the district approved only a $60.6 million contribution in 2007 while its ARC stands at nearly $190 million.

"If MPS continues to underfund their OPEB liability, the district estimates the liability will increase to $2.9 billion in 2010, and to nearly $4.9 billion by 2016," which would require a $226 million ARC payment, and $348 million payment, respectively, the report said.

The district is faltering financially even amid large property tax increases due in part to declining enrollment that hurts its state aid levels. The district recently said it wanted to review dissolution and it is hiring an independent firm to conduct a sweeping assessment of its finances.

Like MPS, the analysis found that most governments have so far failed to take much action to address their OPEB liability. "Large OPEB liabilities left unattended will cost taxpayers dearly in the future. In several cases, the total unfunded OPEB liability towers over the amount of taxes a county, municipality, or school district brings in annually," the report warned.

But the report also urges officials to proceed cautiously when considering the use of debt because of the burden posed to a government's credit by swapping the "soft" OPEB liability for a "hard" general obligation or revenue-backed bonded debt.

The institute also urges against risky investments. Five southeastern school districts - including Waukesha and Kenosha - have seen the value in a $200 million investment made in an attempt to help fund their OPEB trusts drop by $120 million.

The districts have said they were not aware they were investing in collateralized debt obligations that included subprime mortgage securities and they did not know the transaction included a credit default swap. The districts are considering a lawsuit against the financial firms that managed the transaction. None of the five had sought an independent analysis of the deal.

"With school districts working under tax revenue caps, districts clearly felt they had to increase revenue through investments to fund these looming liabilities - yet the increased promise of greater returns instead brought greater losses," the report warns.

The institute recommended that governmental units review the benefits they offer and consider scaling them back. Governments should also consider establishing irrevocable trusts to fund the liability over the long-term and should weigh the benefits and risks of borrowing.

"Certainly, it would be much better for local governments to reduce or alter benefits before converting their liabilities into hard debt. Yet doing both in concert with one another may be able to relieve the burden on future taxpayers," the report read. Elected officials should also be barred from oversight of benefit systems they participate in, the study recommended.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.