First, let’s look at this recent item: actuaries miscalculated contribution for Milwaukee County pension fund.
The Milwaukee County Pension Board’s actuarial consultant set the 2015 payment to the employees’ pension fund too low by a whopping $19.5 million, the consultant admits in a new report.
The difference will have to be made up through increases in subsequent years’ payments, county officials said.
This year’s $38.3 million payment was less than it should have been in part because the consultant forgot to include a routine cost-of-living adjustment paid to retirees each year in the plan’s overall funding requirements, the report says.
The annual adjustment is equal to 2% of an employee’s first pension payment, and that error alone accounted for $8.9 million of the underpayment amount.
After correcting the mistake in time for next year, and adjusting for a few policy changes adopted by the pension board, the required 2016 payment will be $59.4 million, according to Larry Langer, principal consulting actuary for Buck Consultants LLC in Chicago. That figure is $21.1 million more than this year. Langer included the bad news in his annual actuarial report.
- Unlike yesterday’s post, this is a substantial difference. The total payment was supposed to be about 50% more than it was originally calculated.
- I’m not understanding that if the COLA mistake was $8.9 million or the $19.5 million. Either way, notice how expensive a COLA benefit is, given the one-year difference in a payment. This isn’t a difference of the liability value (which would be more), but how much they were supposed to pay for it that year.
But there was a meeting yesterday, so let’s check out if we got new info there:
The Milwaukee County Pension Board’s actuarial consultant is sheltered under its contract from reimbursing the county for the full impact — increased to $11.1 million Wednesday — of the actuary’s mistake in the 2015 pension payment, records show.
The Pension Board’s contract with Buck Consultants LLC limits the company’s liability for negligence to $1 million, far short of the impact of its multimillion dollar mistake in setting the 2015 payment to the employees’ pension fund.
The dollar value of the mistake — not adding the routine cost-of-living adjustment paid to retirees each year in the pension plan’s funding requirements — was disclosed to the Pension Board and the finance committee of the County Board. An actuarial report released Tuesday estimated the value of the mistake at $8.9 million.
The Pension Board had inquired a year ago about reduced funding requirements used in setting a $38.3 million payment for this year, Grady said in response to questioning by Supervisor Theodore Lipscomb Sr., co-chairman of the finance committee.
Langer acknowledged Wednesday that the inquiries did not prompt him to review all possible problems.
The main reason for that limited review was that there are always annual variations in a pension fund with assets valued at more than $1.7 billion and total obligations of more than $2.2 billion.
Langer pledged Wednesday to change the evaluation process in the future. The Pension Board pays Buck Consultants a basic annual fee of $65,438 for its actuarial services.
The 2015 pension payment was set too low by a whopping $19.5 million, when considering the cost-of-living adjustment mistake and policy changes adopted by the Pension Board. The $11.1 million mistake portion of that must be made up within five years, under pension plan rules, according to Grady.
Okay, lots of numbers being thrown around here. There was some sort of policy change in addition to the COLA error.
HISTORICAL LOOK AT MILWAUKEE COUNTY PENSIONS
Given that something had changed, I decided to look back at prior experience in the fund.
I will pull two tables. This ten-year historical view from numbered page 23.
That employer contribution number in 2009 was suspiciously large — the sure sign of a pension obligation bond.
Second is a five-year comparison of the contributions and the ARC on numbered page 20.
Yup, a POB.
But wait, I’m dimly remembering a Milwaukee County Executive who ran for governor of Wisconsin in 2010….
SCOTT WALKER AND THE POB
In a few earlier posts, I talked about how GOP presidential candidate Scott Walker got his political start as Milwaukee County Executive, and specifically dealing with a really bad pension benefit design.
- Scott Walker: the Public Pensions Connection
- Pension Quick Takes: Lawsuit (and Scott Walker teaser) Edition
- Public Pension Watch: No Pensions for Politicians (plus Scott Walker)
He did win his 2010 race, and interestingly, his Democratic opponent, Tom Barrett, brought up the POB issue.
Tom Barrett says gubernatorial rival Scott Walker was reckless in using pension obligation bonds to solve a crisis
Republican Scott Walker likes to tout his credentials as a reformer who led a people’s crusade to clean up a county government racked by pension corruption and fiscal mismanagement.
His Democratic rival in the governor’s race, Milwaukee Mayor Tom Barrett, is taking aim at the heart of Walker’s white-knight appeal — and his record as Milwaukee County executive — in a multimedia barrage.
In a statewide TV spot, buttressed by his campaign’s blog and Facebook and Twitter accounts, Barrett paints an alternate vision: A county executive who recklessly borrowed a mountain of money to help pay for those bloated county pensions.
In a TV ad, Barrett says he and Walker faced the same pension funding crisis.
“Under Tom Barrett, the city of Milwaukee met the crisis head on, and Barrett used smart budget cuts to help solve the problem,” the ad says. “In Milwaukee County, Scott Walker borrowed $400 million — $400 million — and passed the pension debt on to the next generation. So who do you trust? It’s Tom Barrett who’s a straight shooter, with honest plans for Wisconsin.”
You know, he has a point.
But back to the article (I’m skipping to the end).
3. [Claim:] Tom Barrett faced the same pension crisis and made tough choices and smart cuts instead of borrowing money.
[Check:] Were their situations really comparable? In the big picture, the county’s fund is in tougher shape.
When it came to choices, Barrett had little choice but to meet the problem head-on, because the city’s charter ordinance requires that officials keep the pension fund at 100 percent funding. The county is not required to meet that threshold, so it can underfund the account today in hopes that market increases will cover the difference later.
That’s…. not really helping the Walker position.
I will mention that after the POB, the county seems to be meeting the required payments. When calculated correctly.
I think the employee/employer split looks bizarre. Ultimately, all the money comes from the employer — the employee contributions are just taking an extra step: employer -> employee -> pension instead of employer -> pension.
There may be some tax or legal issue that differs between the two, but from a money point of view the entire pension contribution is coming from Milwaukee County.
PRESIDENTIAL RACE ISSUE?
Probably not. I could rope in Chris Christie on this one, but it seems to me that there are a couple of things blunting pension obligation bonds as a presidential race theme:
- Explaining why POBs are really bad is tough enough, even when politics isn’t involved
- I really doubt many reporters understand enough to ask good questions. Some do exist, but not many, so it will be difficult to spread a story beyond, say, the WSJ, NYT, or Washington Post. That’s not the kind of issue that gets spread broadly or people talking
- This isn’t a specific partisan issue.
- Everyone will pay attention more to “pension reform”, bogus or not — not only can Chris Christie and Walker go that route, but also Bobby Jindal. Probably some others as well. Because…
- What are we up to now? 20 GOP candidates?
Plenty of stuff sucking up political oxygen now. I don’t see POBs getting any air right now. I’ve got a backlog myself with regards to Boston (MBTA), 80% funding myth, and.. and.. and… a bunch of stuff in draft, but current events keep yanking me away. Greece and Chicago, in particular.
There are much “sexier” issues out there right now that they’ll ask presidential candidates.
They’ll ask candidates’ opinions on Ariana Grande licking a donut before they’d ask about POBs.
Still, a girl can dream.
Welcome to the Public Pension Watch: Hurray for New Jersey!
Requesting a Public Hearing on Public Pension Actuarial Practice
Public Pensions Watch: Sometimes Politicians Do the Right Thing