County Pension Bonds Saved Up To $269 Million
Could the city use this financial mechanism to lower costs?
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.
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.
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.
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. “It’s 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.