Milwaukee County Pension Scandal Number 2?
Milwaukee County is going ahead with executing a plan for its pension system that involves borrowing money, investing it in the market, and hoping to earn a 2% profit. The plan has garnered support from County Executive Walker, the County Board, and the county’s actuary consultant.
In summary, in order to pay for the massive pension funding gap caused by the first scandal, and lately the market’s performance, the county needs a lot of money. To get that money they’ve issued $400 million in bonds since the start of 2009. With the proceeds from the issuance of those 6% bonds, they’ll invest in the market at a hope of earning an 8% return. They’ll then use the excess 2% they hope to earn to pay for the pension liabilities. That amount of profit as planned is $237 million.
Seems like a good plan, until you consider what happens if things go wrong. Assuming the stock market performs only at the rate of interest on the bonds, the county will have undertaken a large risk for zero reward. More catastrophic though, would be for the market to under-perform the interest rate on the bonds. Milwaukee County will then find itself in a far worse financial situation, with likely no ability to short-term borrow their way out of it. The county has to do something, but borrowing-and-investing appears to be quite aggressive.
The answer is because it’s extremely risky.
Of course something that looks great on paper, but has a lot of long-term risk is just what a politician can feed on. County Executive Walker is more than happy to look at this as a fix as he runs for Governor and looks to leave Milwaukee County with its troubles behind. The Milwaukee County Board seems posed to go along, perhaps because it avoids drastic cuts that will be difficult to stomach (and get re-elected on).
The costs from the pension scandal haven’t gone away, and in a year where budgets are bad for every level of government dependant on property taxes, things are real bad for the county. While calls have gone out to dissolve the Milwaukee County government and eliminate the County Executive position, they seem far-fetched. It’s time though to start small and have serious discussions about off-loading aspects of Milwaukee County to other units of government, existing or new, privitazed or not. Consolidating services with the City of Milwaukee may provide cost savings for both departments, especially in the areas of information technology. Any proposal from privitazing the airport to creating a regional transit authority should be investigated thoroughly with the hopes of putting Milwaukee County in a better long-term fiscal position.
Of course, duplicate and competing law enforcement departments and many other functions are wasteful, but we are talking about Tom Barrett and Scott Walker sitting down and agreeing on something. I don’t think that’s going to happen, even though I agree it should.
Please remember, like business, a lot of the problems in providing government services comes from the high cost of management. It doesn’t make any difference what you look at from schools to safety. The people that actually do the work, teachers and cops, have to many bosses.
You ask, sarcastically, “Why doesn’t the city do this?”. Well, they do, which is the main cause of the projected $90 million deficit for 2010. The pension fund’s stock market invstments lost so much money that the city’s going to have to make up for the difference by contributing to the pension from the city’s general funds. That is where most of that huge deficit comes from. And almost every municipality in the country does some type of bond-and-invest scheme. Not arguing against your thesis that it’s risky and perhaps not wise – in fact, the point that the stock market crash is the main culprit for the city’s budget problem pretty much proves your point. Just saying it doesn’t make the county unique in the slightest sense, as you seem to imply.
I also fundamentally disagree with Jeff’s assertion that “a lot of the problems in providing government services comes from the high cost of management.” This is false for almost every service you look at (compared to comparable competing private services). For example, Medicare has a 5% administrative/overhead cost, while private insurers generally are in the range of 30%. Our water works has a 1% rate of return, versus privatized water utilities that operate with 13% or greater rates of return. The difference is the private sector’s need for profit. Which, of course, is the entire point of having government: to provide services where it’s deemed that the public good should be more important than profit.
@JCG The City of Milwaukee does not do what the Milwaukee County is doing regarding pension obligation borrowing, because of the risk. I verified this with the budget office.
Have we already forgotten about Orange County, California?
http://www.nytimes.com/1994/12/03/business/worldbusiness/03iht-orange_0.html
Amusing to see the phrase “bail out” in 1994.