Bruce Murphy
Murphy’s Law

County Pension Bonds Saved Up To $269 Million

Could the city use this financial mechanism to lower costs?

By - Dec 21st, 2021 04:03 pm
Milwaukee County Courthouse. Photo by Sulfur at English Wikipedia [GFDL ( or CC-BY-SA-3.0 (], via Wikimedia Commons

Milwaukee County Courthouse. Photo by Sulfur at English Wikipedia (GFDL) or (CC-BY-SA-3.0), via Wikimedia Commons

Depending on how you measure it, Milwaukee County has saved at least $164 million and perhaps as much as $269 million by issuing pension obligation bonds, first issued in 2009, and refinanced several times since then. The estimated total savings achieved from 2009 through 2020 were computed by Milwaukee County Comptroller Scott Manske. It’s likely the county will save additional money over the next decade, until the bonds are completely paid off by the end of 2030.

If not for these bonds, the total cost of the infamous 2000-01 county pension plan for taxpayers, recently estimated by Urban Milwaukee to have at total price tag of $1.34 billion, would have been even higher.

Pension Obligation Bonds can be very complicated and it took Manske (who had given Urban Milwaukee a ballpark estimate of about $100 million in savings for the county) some time to compute his figures. The basic idea is simple enough: you borrow the the money (in this case $400 million minus $3 million paid to issue the bonds, leaving $397 million) at an interest rate that is lower than your expected market return on the stocks and bonds in the pension fund.

Back in 2009, the county’s average annual return on the pension fund was about 8% and the bonds were purchased at 6.2% interest. The difference between those two rates was what would generate the savings.

Then-Milwaukee County Executive Scott Walker championed the idea, but it was actually devised by an employee benefits workgroup that was created some time after the pension scandal erupted. Manske, who was then the county controller, an appointed position, was part of a group that included staff from county budget office, human resources and other departments, who sought ways to lower the costs of the pension.

The idea of pension obligation bonds “had received good and bad press,” Manske recalls, and definitely had risks. The key, he notes, is the first couple years of a bond issue. If the stock market tanks and the pension fund returns plummet, “you lose a portion of the principal” and may never recoup that loss, Manske notes.

But the county’s timing turned out to be very fortuitous. It was right after the 2008 Great Recession and by the time the bonds were issued in April 2009, the market was rebounding. The county pension fund grew by 20% in 2009 and 11% in 2010, which put the bond issue ahead of its projected savings.

By 2013 interest rates had declined significantly and Manske, who won election to the newly created position of county comptroller in 2012, worked with new County Executive Chris Abele to refinance the bonds. By then interest rates were declining and the county was able to secure rates as low as 3% and even 2% for some of the bond issues.

“The day before we were going to issue the bonds,” Manske recalls, “the state of Ohio backed off from issuing $1 billion in bonds it had announced.” That had primed the market for a bond issue and “everyone scooped up our bonds,” he notes. “People kept bidding lower and lower.”

The county again refinanced in 2021, achieving some additional savings. These refinancings helped lower the average interest rate of the bonds to just 4.7% from 2009 through 2020 while the average return of the pension fund’s investments was 8.94%. The $397 million in bond proceeds invested in the pension fund earned $362 million over that period, minus $198 million in borrowing costs (the 4.7% interest), for a net savings of $164 million.

This however, overlooks the impact of compounded interest: that $362 million in investment returns from the pension fund itself earned some return over the 11-year period, which Manske calculates at $105 million. Including that would increase the total savings to $269 million.

Is there a standard way to measure this — whether to include the interest earned on interest — in the bonding industry? “I haven’t seen many calculations of this for pension obligation bonds,” Manske says. “Generally pension bonds are successful or they’re not.”

And clearly this one is a success, by whichever way you measure it. And that’s likely to continue through 2030, given the low interest rates locked in for the bonds.

The county’s strategy has been suggested as a possible option for the City of Milwaukee, which faces its own issues with rising pension costs. But as Jeramey Jannene reported for Urban Milwaukee, some city officials are wary of the idea.

If interest rates go the wrong way the banks could own you,” Alderman Nik Kovac warned. Its a huge risk.”

They got lucky,” said city budget director Dennis Yaccarino of county officials. There are probably 10 times as many examples of pension systems that lost money by doing this.”

If the city is to consider issuing pension obligation bonds, the window of opportunity for this could be closing. The current prime interest rate is at 4.25%, higher than the 3.25% rate in 2013, when the county first refinanced its bonds, but still very low by historic standards. But the Federal Reserve is expected to raise its rate two or three times in the coming year.

And one final note: Urban Milwaukee’s calculations of the cost of the 2000-01 pension plan included the actual cost (principal and interest) of the bonds and the total returns of the pension fund from 2009-2020 and the contracted payments for the bonds in future years along with projected market returns on the pension fund for future years. Only the projected market return could vary, potentially decreasing — or increasing — the total cost of the pension plan.

5 thoughts on “Murphy’s Law: County Pension Bonds Saved Up To $269 Million”

  1. sbaldwin001 says:

    This financial maneuver seems desperate to me. Also, if it fails, lawyers representing pensioners will point to it as the cause of the pension system collapse rather than to the over-promising of city politicians. The public will better served by more conservative practices.

  2. Thomas Williams says:

    The foolishness of all this after we get beyond the insanity of the pension “plan” is the idea of creating a system which is dependent on the stock market which has little relationship to the value created by the work of the pensioners of the county! That wealth resides in the pockets of those who work and/or reside in Milwaukee county! Will we ever move to a tax system based on the wealth created in the work places of a municipality/county rather than based on the esoteric worth of the property? Our property tax system assures that the work of public employees is little valued as they create schools, safe streets, public parks, and other infrastructure which enables people to work and create economic growth! We should have local income taxes to pay for such! Peace TW

  3. Marty wall says:

    Thank you Bruce Murphy for important, informational series on the County Pension debacle.
    Sadly the community has learned little. The mismanagement of Pensions continue.
    Now, the city of Milwaukee Pension requires investigation.

    In 2004, when the reign of Mayor Barrett began, the City of Milwaukee had a pension funded at 104%! Milwaukee posted the highest Bond rating for a municipality in the USA.
    17 years later the Pension of the City needs to be rescued. It is now approximately 81% funded. Wow!
    In March, 2020, the pension lost $700 million dollars that month. This disproportionate loss in value appears to be associated with a poorly diversified portfolio. Unfortunately, the Pension Board, the Common Council, the Comptroller, and the Mayor have all been silent. The Board has gone into secret “closed session” more than 15 times since the Board quietly fired a highly paid “out of town” money manager after the losses.. The Board quietly started litigation regarding this incident. No public statement has been made! When the Executive Director was contacted in regard to exorbitant losses, this citizen was referred to the Wall Street Journal. Why all the secrecy?
    A recent “Mayor’s Pension Task Force” met four times, took no public comment, or suggestions and released a 29-page report with no recommendations. Curiously, the 300-page Appendix was kept secret and not provided to URBAN MILWAUKEE. Why the secrecy??
    The Pension System works for some at the detriment of the People. The City of Milwaukee Corporation Officers, including Alderman, Comptroller, Treasurer, and City Attorney, Police and Fire continue to receive a pension benefit 56% better than new employees. The out-of-town money managers receive their Millions ($42 million dollars in 2019). Some Officers get a special benefit not availed to all city employees. WHY??
    Because of this financial precipice, the City of Milwaukee Bond rating has been downgraded multiple times and now hovers just above “junk status.” This warrants an audit or investigation!!
    We have no Financial Updates on this matter from City Hall. THANK YOU UM.

  4. NieWiederKrieg says:

    The private sector has eliminated “pension plans”. The private sector has replaced the “pension plan” with the “401K plan”. There was no negotiation or argument about it. Pension plans for middle class workers are history. Only the upper crust of society are allowed pension plans these days.

    That being said, why are taxpayers still being gouged for the cost of government employee “pension plans”??? End this insanity immediately.

  5. gerrybroderick says:

    Fairness would note that “The Great County Pension Debacle” was caused by County elected official’s reliance on the analysis of their high priced actuarial firm, Mercer, Inc. (who latter would pay $45 million dollars to Milwaukee County in settlement for their ill founded advice).

    The blame placed on numerous then-County Supervisors by critics, soon led to their election defeats, as well to my election as one of the “reformers.”
    It took some time for me to understand that had I been in the same position as those supervisors (so roundly assailed for their “negligence”) that, I too, would likely have voted in favor of the flawed plan. So,”government malfeasance? Or, corporate malfeasance?” I guess that depends on which ox you choose to gore.

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