Milwaukee’s apathy toward the management of its retirement system—specifically regarding its assumed rate of return—has put more than 1,300 public sector jobs in jeopardy.
The city’s annual pension contribution is slated to double from $73 million per year to $150 million in 2023, Fox 6 Milwaukee recently reported. Milwaukee officials claim without additional resources from Wisconsin state lawmakers, hundreds of workers could be laid-off over five years starting in 2023. Federal aid from the $1.9 trillion American Rescue Plan can’t be used for pension obligation costs.
“I don’t have my head in the sand here — my hope is that we will have a response and a partnership with the state before then, but this is the time to do that,” Milwaukee Mayor Tom Barrett told Fox 6.
But the city could’ve easily avoided getting to this point, had they used more realistic investment assumptions.
Milwaukee city pension funds were assuming 8.25% investment returns up until the end of 2017—way higher than the national average (around 7.25% at the time). That rate would’ve been illegal for private pension funds to use in their own accounting.
By keeping a high investment assumption, the city was able to that its pension funds were fully funded. But an 8.25% investment assumption wasn’t realistic or sustainable. Milwaukee recognized in fiscal year 2018 it needed to lower its expectation on investment returns, which meant adjusting its accounting of unfunded liabilities.
Milwaukee is now assuming a 7.5% investment return—still above the national average and almost certain to decline along with other major pension funds in future years.
Expecting less money in investment returns means recognizing that contribution rates into city pension funds have to increase.
Even worse, a more realistic investment assumption of 6.5% could drop its funded status to 71%, rather than 79.5% using the current investment assumption, according to the most recent report for Milwaukee’s combined pension plans (General, Police, and Fire).
This means the city’s budget concerns are likely only the beginning. If Milwaukee moves toward more realistic accounting measures, as it should, there will be a need for even larger pension contributions.
Other municipalities should learn from Milwaukee’s apathy and realize that just because it looks like a pension fund has a large amount of cash on hand, that doesn’t mean it’s resilient. Realistic assumptions are necessary, otherwise the accounting will be off.
And it isn’t just future retirees being put at risk. Today’s workers and taxpayers could be paying the price for Milwaukee’s city pension fund not better accounting for the cost of benefits being promised.