Milwaukee pension debt clouds Wisconsin’s otherwise positive retirement system picture

Link:https://reason.org/commentary/milwaukee-pension-debt-clouds-wisconsins-otherwise-positive-retirement-system-picture/

Excerpt:

According to its most recent actuarial report, the Milwaukee County Employees’ Retirement System (ERS) had a funded ratio of 75.3% and unfunded liabilities of $569 million. The county also has separate retirement plans for mass transit employees and temporary employees, but these plans have relatively small unfunded liabilities.

Milwaukee County ERS’ liabilities grew, in part, because the county did not make its full actuarially determined contributions between 2012 and 2016, according to its most recent Annual Comprehensive Financial Report. During that five-year period, the county’s contributions fell $12 million short of recommended levels.

Since 2015, Milwaukee County’s contributions to ERS have tripled from $19 million to $57 million, as it began to meet and then exceed actuarial recommendations. These contributions exclude debt service the county pays on pension obligation bonds it issued in 2009 and 2013.

Author(s):Marc Joffe

Publication Date:13 Jan 2022

Publication Site: Reason

Bonds are the key to reining in runaway municipal pension plans

Link: https://thehill.com/opinion/finance/588537-bonds-are-the-key-to-reining-in-runaway-municipal-pension-plans?rl=1

Excerpt:

In what is the product of the sustained low-rate environment, many municipalities are considering addressing their pension position through bonds. This should be encouraged by policymakers and explored by pension systems.  

Bond markets are offering municipalities the opportunity to exchange discount rates of 6, 7 and sometimes even 8 percent for bonds with yields below 3 percent. The spread between the discount rate and the bond yield is the root of the appeal of pension obligation bonds. 

Author(s): Eric J. Mason

Publication Date: 6 Jan 2022

Publication Site: The Hill

5 THINGS WRONG WITH ILLINOIS HOLDING 30% OF U.S. PENSION BOND DEBT

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It is bad Illinois has the nation’s worst pension crisis, but state politicians have made it worse by using risky debt to delay the day of reckoning, and done so to the point that Illinois now owes 30% of the nation’s pension obligation bonds.

Pension obligation bonds are a form of debt used by state or local governments to fund their pension deficits. Illinois holds $21.6 billion of the nation’s $72 billion pension obligation bond debt.

The theory behind the bonds is that if a pension system can borrow money at a lower rate by selling bonds and earn a higher percentage from investing those funds, then it has realized a net gain using them. The issue is the gamble rarely works out that way, as the Government Finance Officers’ Association points out. Pension obligation bonds place taxpayer money at risk and often leave governments saddled with more debt rather than less. They often do not achieve a high enough return to justify their use.

Illinois’ five statewide retirement systems hold $144 billion in debt, according to official state reporting based on optimistic investment estimates. But Moody’s Investors Service says the true debt is $317 billion, which it calculates using more accurate methods common in the private sector.

Author(s): Adam Schuster, Aneesh Bafna

Publication Date: 10 Sept 2021

Publication Site: Illinois Policy Institute

Report finds Illinois holds 30% of pension obligation bond debt in nation

Link: https://www.thecentersquare.com/illinois/report-finds-illinois-holds-30-of-pension-obligation-bond-debt-in-nation/article_0ab6d148-1716-11ec-b36b-1b03ea725eeb.html#new_tab

Excerpt:

A new report shows Illinois holds 30% of the nation’s pension obligation bond debt.

A pension obligation bond is a form of debt that some states use to make payments to state-run pension funds. A pension obligation bond gets paid out by a third party and the state then pays back that loan with interest. Financial experts often advise against the use of pension obligation bonds, said Adam Schuster of the Illinois Policy Institute.

….

The interest on the pension obligation bonds continues to climb and is leaving Illinois in a worse spot than it was previously in. The state has borrowed a total of $17.2 billion since 2003, but repayment cost is now $31 billion. Pension obligation bonds can save taxpayers money if the interest rates on the bonds is lower than the rate of return on the pension investments. If the rate of return drops below the interest rate on the bonds, then taxpayers are on the hook for the difference. This is a strategy that Schuster said is the same as gambling with the state’s money.

Author(s): Andrew Hensel

Publication Date: 16 Sept 2021

Publication Site: The Center Square

Guest Commentary | Politicians’ next pension ‘fix’: Gambling with your money

Link: https://www.news-gazette.com/opinion/guest-commentary/guest-commentary-politicians-next-pension-fix-gambling-with-your-money/article_7865780f-7ed8-5c1e-8cc5-1ee4e43ca3cb.html#new_tab

Excerpt:

Gambling on the stock market to get out of financial troubles. It’s a fool’s game, but that’s exactly what some politicians in Illinois are considering now to address their cities’ growing pension crises. Lawmakers want to borrow money from the bond market to pay down pension debts by issuing what are known as pension-obligation bonds.

The borrowing scheme is a bit more complicated than the household example, but in essence, pension-obligation bonds are all about taking out a loan, then investing that money and hoping the returns beat out the costs of the loan.

It’s a lose-lose game for taxpayers. If politicians get it right, governments will have extra money to spend and grow even bigger. And if politicians get the bets wrong, they’ll come after taxpayers to pay off their gambling losses.

That’s one of the reasons why national organizations like the Government Finance Officers Association say “state and local governments should not issue POBs.”

Author(s): Ted Dabrowski and John Klingner

Publication Date: 12 September 2021

Publication Site: The News-Gazette

Main Street Pensions Take Wall Street Gamble by Investing Borrowed Money

Link: https://www.wsj.com/articles/main-street-pensions-take-wall-street-gamble-by-investing-borrowed-money-11630774800

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Excerpt:

Many U.S. towns and cities are years behind on their pension obligations. Now some are effectively planning to borrow money and put it into stocks and other investments in a bid to catch up.

State and local governments have borrowed about $10 billion for pension funding this year through the end of August, more than in any of the previous 15 full calendar years, according to an analysis of Bloomberg data by Municipal Market Analytics. The number of individual municipalities borrowing for pensions soared to 72 from a 15-year average of 25.

Among those considering what is known as pension obligation borrowing is Norwich, a city in southeastern Connecticut with a population of 40,000. Its yearly payment toward its old pension debts has climbed to $11 million in 2022—four times the annual retirement contribution for current workers and 8% of the city’s budget. The city will vote in November on whether to sell $145 million in 25-year bonds to cover the pensions of retired police officers, firefighters, city workers and school employees.

….

In 2009, Boston College’s Center for Retirement Research examined pension obligation bonds issued since 1986 and found that most of the borrowers had lost money because their pension-fund investments returned less than the amount of interest they were paying. A 2014 update found those losses had reversed and returns were exceeding borrowing costs by 1.5 percentage points.

Author(s): Heather Gillers

Publication Date: 4 September 2021

Publication Site: Wall Street Journal

Elorza’s pension proposal relies on a risky approach and an adviser linked with 38 Studios

Link: https://thepublicsradio.org/article/why-elorzas-latest-proposed-pension-fix-faces-a-lot-of-questions-

Excerpt:

Providence’s pension crisis has its roots in the late 1980s. That’s when the city’s Retirement Board approved unusually generous compounded cost of living adjustments for more than 2,500 city workers and retirees. Decades later, that move helps explain why there’s a $1.2 billion gap between the pension balance and the amount owed to current and future retirees.

The pension crisis has defied attempted solutions for years. Providence officials say the city has just 22% of the money needed to meet its long-term pension obligations. And the amount of the city budget consumed by the pension is growing 5 percent a year, to about $93 million currently. Without a change, that annual payment will rise to $227 million by 2040.

Mayor Jorge Elorza said these pension costs are unsustainable.

“It’s only a matter of time before they continue to squeeze everything else out of our budget, so that we’re cutting deeper and deeper into the bone,” he said during a recent news conference.

Elorza’s plan involves selling $704 million in pension obligation bonds. The idea is that these bonds could generate enough of a return to boost the pension system’s funding to more than 60 percent.

Author(s): Ian Donnis

Publication Date: 1 June 2021

Publication Site: The Public’s Radio

Mayor Of Quincy Proposes $400 Billion Bond To Fund Pension Plan

Link: https://patch.com/massachusetts/quincy/mayor-quincy-proposes-400-billion-bond-fund-pension-plan

Excerpt:

The Mayor of Quincy, Thomas Koch, proposed a bond of $400 billion to city council to fund the entirety of the town’s pension plan. Koch’s proposal for this bond includes changing the way Quincy’s pension liability is paid down. Under the new plan, the pension system would be paid all at once, as opposed to a payment annually which can vary in amounts each year.

Koch claims that this new plan and bond will save the city lots of money each year and set a consistent expectation of expenses for pension payments. Quincy’s pensions and health insurance are the largest fixed costs the city has that change annually, so Mayor Koch wants these issues to be top priorities when it comes to discussing the city budget. The proposal was sent on Monday and city councilors sent it to the council’s finance committee, which has yet to schedule a hearing for the proposal.

Author(s): Colin Ames

Publication Date: 7 March 2021

Publication Site: Patch.com

McKee weighs in on teachers’ contract talks, pension obligation bond

Link: https://www.providencejournal.com/story/news/local/2021/06/01/mckee-takes-stance-pension-obligation-bond-teachers-contract-talks/7494717002/

Excerpt:

Governor Dan McKee on Tuesday weighed in on two critical issues facing Providence: shakeups in contract negotiations with the teachers union and Mayor Jorge Elorza’s plan for a pension obligation bond to throw the city a financial lifeline.

….

On Elorza’s idea for a $704-million pension obligation bond to address the city’s unfunded pension liability, McKee raised skepticism, suggesting the plan is risky and that the timing isn’t right.

“I think it’s rolling the dice,” he said. “And again, I’ll reflect back to the time I was a mayor. I made sure that there was actuaries that supported any decision made in our local pensions including the police pension. I haven’t seen any actuaries that I would rely on. I’m not sure there’s time right now between now and the end of session to do that in a way that I would feel comfortable with.”

Author(s): Amy Russo

Publication Date: 1 June 2021

Publication Site: The Providence Journal

Letter: Why should taxpayers bear CalPERS risk?

Excerpt:

The city [Chico] has been receiving more sales tax, property tax, developer fees, and Utility Tax revenues every year as development brings more people to Chico. Instead of maintaining and improving infrastructure, Staff has poured these funds into their pension deficit, $11,500,000 this year, by 2025, $13,000,000. This money is allocated from all the department funds, at the expense of infrastructure and services.

Instead of pursuing new taxes that will hurt our local economy, council needs to switch from CalPERS’ defined benefit plan to a defined contribution plan, like 401Ks. Why should the taxpayers but never the employees bear the burden of the risks taken by CalPERS? The POB scheme, which Dowell admits is “gambling,” puts ALL the burden on the taxpayers, forever. Any new revenues will go to the pension obligation first.

Author(s): Juanita Sumner, Chico

Publication Date: 26 May 2021

Publication Site: Oroville Mercury-Register

American cities and states have issued $72 billion of pension bonds. Here’s what that means

Link: https://www.marketwatch.com/story/american-cities-and-states-have-issued-72-billion-of-pension-bonds-heres-what-that-means-11621971315

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Excerpt:

In his 2022 budget address, Milwaukee Mayor Tom Barrett wrote of his city’s predicament, “We are facing an unsustainable demand driven primarily by the pensions for public safety employees. We must begin preparing now, setting aside money to blunt the impact of the massive payments coming due in just two years.”

For many local governments, making a big deposit all at once and being able to budget for more manageable payments in the future, for both debt service and annual pension payments, can feel like a relief.

But there are many reasons it’s a bad idea, and one that many municipal-finance observers find problematic.

Author(s): Andrea Riguer, Katie Marriner

Publication Date: 26 May 2021

Publication Site: MarketWatch

Providence is ready to roll the dice on a pension bond

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202105211039SM______BNDBUYER_00000179-8608-ddb0-adf9-ff4cb4b00001_110.1

Excerpt:

Red flags waved as Providence Mayor Jorge Elorza proposed issuing $704 million in pension obligation bonds to deal with a pestering unfunded liability problem in Rhode Island’s capital city.

The amount exceeds the city’s annual operating budget. Bond markets often frown on such borrowing and sentiment among state officials who must sign off is uncertain. Skeptics also call the city’s fiscal management track record shaky, while memories linger of a fiasco in Woonsocket, which tried a similar move nearly 20 years ago.

Author(s): Paul Burton

Publication Date: 21 May 2021

Publication Site: Fidelity Fixed Income