What Can City Do About Pension Crisis?

City of Milwaukee officials are staring down a fiscal cliff in 2023.

The cash-strapped city will, based on the latest estimates, need to come up with at least an additional $90 million annually to fund its pension fund. The employer contribution will grow from approximately $70 million to an amount in excess of $160 million.

The funding requirement creates a nearly impossible situation for city officials.

Since 2004, when Mayor Tom Barrett took office, the city will have gone from having to contribute nothing for years to an overperforming pension to having to fork over more than half of its property tax revenue. At the same time, the city has seen an effective cap on property taxes instituted by the state and an inflation-adjusted reduction in state shared revenue of more than $100 million annually.

Milwaukee uses a five-year smoothing formula to determine what it needs to contribute to fully fund its pension, and that formula will reset in 2023, triggering the cash crunch.

The city’s pension is currently 80% funded on an actuarial basis, with $5.5 billion in assets, and the increased contributions are modeled to get it to 100% by 2043. It was at 112.8% on January 1st, 2010.

The City of Milwaukee entered the current five-year period assuming an 8% annual return was possible, but reduced estimates to 7.5% starting in 2019 based on recent past performance and future estimates. That change alone is cited as the largest driver in the need to increase funding.

And 2020 did the city no favors. The Milwaukee Employees’ Retirement System, as the fund is formally known, ended the year with effectively the same amount in assets as it started the year. Given the volitivity in financial markets, that’s being considered a win.

“The good news is the status of the pension fund is good,” said Jerry Allen, ERS executive director, to members of the Finance & Personnel Committee on January 13th. “What looked like a total catastrophe turned out to be okay.”

The city’s pension plan is still funded better than most. “The median funded ratio for public pensions in the United States is somewhere near 72%,” said Larry Langer, the city’s actuarial consultant. But the City Charter calls for it to be fully funded.

“Every year come budget time we have the conversation about the looming pension contribution that is due in 2023, but I don’t believe we’ve had enough conversations about how we’re going to pay for it,” said Alderwoman Milele A. Coggs.

“There are a lot of options we can look at,” said budget director Dennis Yaccarino. He ticked off a list of items including capping the city’s annual contribution, future benefit changes, employee benefit changes and pension-obligation bonds. “We are just not ready to come up with anything specific at this point.”

“If there is going to be a cap on city contributions there is going to have to be a change to the City Charter,” said assistant city attorney Patrick McClain. “There are simply too many variables at this point for us to give a simple thumbs up or thumbs down.”

He said litigation was “almost guaranteed” as a result of any changes and that issues like restrictions from state law could come into play.

“At this point we don’t have enough information to give any sort of conclusive guidance,” said Brown.

Langer and Allen’s presentation included a slide that showed the result of capping the city’s contribution at $110 million with a 2% annual increase. The cap would leave a persistent unfunded actuarial accrued liability of $1.4 billion. The amount is currently is $1.3 billion, but boosting the annual contribution to over $160 million would see it fall to zero by 2043.

“This is not an easy question to come up with an answer,” said Yaccarino. “We are also going to have to look at what happens to services if we come up with significant payroll reductions.”

He said he hoped to have something ready to approach the state with “shortly.” He said he knows state officials are aware of the issue. Yaccarino estimated things could move forward in February.

“We come up to the annual budget and we all face the same issues again, it’s like Groundhog Day,” said Alderman Michael Murphy.

The city has been building a rainy day pension funding reservice, which currently holds about $40 million. But that amount would be washed away in a single year under the current estimates.

Approximately 80% of the city’s contribution goes to cover the costs of the city’s sworn police and firefighters. But the city’s ability to negotiate new labor agreements with those unions, the last city employees protected by collective bargaining laws, is restricted by state law. “We will be seeking some relief from the state from that standpoint,” said Yaccarino.

The budget office, council and Milwaukee Police Department have increasingly discussed strategies to reduce the number of sworn police officers in favor of civilian employees, including an in-process effort to consolidate the city’s fire and police 911 call centers.

What about moving employees to the state system? “It’s not as easy as that, there are some benefit differences we disagree on,” said Yaccarino.

The city, with other partners in Milwaukee County, is pursuing a sales tax that could give the city approximately $50 million annually. “We don’t really want to use the full sales tax just for the pension purpose,” said the budget director.

Murphy asked for written scenarios to be created for how the city could tackle the issue. “I can appreciate it is difficult and complex,” said Murphy, but he noted he couldn’t understate its importance. “We are facing an existential threat to carry out city services under one scenario.”

Coggs said she wanted to see the worst-case scenarios in an effort to avoid them.

Ald. Nik Kovac serves on the pension board. “The situation is not good and there is no obvious way out,” he said, noting he agrees with the assessment of his colleagues, including Allen and Yaccarino.

Ald. Russell W. Stamper, II asked if the city could end up like Detroit. The city declared bankruptcy in 2013.

“The first place I’m going is assuming we do get no help from the state, what are our options internally we can do,” said Yaccarino. “We know that we are going to have to change benefits for future employees and restructure them. We know that we are going to have higher contributions from employees.”

“The average salary of a city employee is like $45,000, so if you have to cut $80 million you can see that’s a lot of services you’re going to have to cut,” said Yaccarino.

“In the State of Wisconsin, my understanding is a city cannot declare bankruptcy,” said Murphy. “We will be entering uncharted territory if things don’t pan out.”

Kovac said things are different between Detroit and Milwaukee. “The state has been squeezing us on purpose and trying to make us go bankrupt,” said the alderman. “The issue in our case has to do with a hostile state government deliberately cutting off access to our own resources. It is not structural in the way Detroit was structural because we have not lost 1.3 million people.”

“Whatever the reason is, the outcome is devastating,” said Murphy, noting that studies have backed up Kovac’s claim. “Exactly,” responded Stamper.

A copy of Allen and Langer’s presentation can be found on Urban Milwaukee.