The Wisconsin Policy Forum issued a research report determining that Milwaukee’s two retirement systems could learn a few lessons from the statewide Wisconsin Retirement System (WRS), which is amongst the best funded pension plans in the United States.
Milwaukee’s respective city and county pension plans have been mandating increasingly higher taxpayer-financed contributions, amounting to $92.7 million for the county plan and $83.2 million for the city plan.
One remedy the report, called Bridging the Gaps, suggests is to assimilate the WRS’s “shared-risk” model, which helps spread the potential risks and rewards of investing between government employers and pension recipients through increases or decreases. WRS was 96.5% funded as of December 31, 2018.
“Instead of automatic annual cost-of-living adjustments (COLAs), the WRS provides higher payments to beneficiaries only if the fund outperforms its target rate of return that applies to those recipients. The reverse is also true—in the case of many employees, previous benefit increases can be taken back due to poor investment performance,” the report said.
Data presented in the report showed that WRS’s COLAs paid to retirees are relatively volatile compared to the COLAs provided by the Milwaukee plans, and fell during and after the Great Recession instead of rising as they did for both Milwaukee plans.
The WRS’s assumptions on its investment returns were relatively high, leading to higher employer and employee contributions in case returns didn’t match expectations. At the end of 2018, WRS lowered its investment return assumption to 7%, below the national median of 7.25%, and below the 7.5% used by both Milwaukee plans.
The city plan’s liabilities grew by about $245 million in 2017 and $475.8 million in 2018 due to changes in the underlying assumptions used to calculate it, according to the report. To reconcile for the heightened liabilities, the city pension will have to increase its contributions to nearly double that of today’s numbers.
“In addition, the WRS is actually being more cautious than the numbers above might imply. Once workers in the WRS retire, the state only needs to earn a 5% rate of return on the assets associated with those retirees to make the minimum necessary payments to them. If the state’s returns exceed the 5% target, then the extra returns on those assets can be used to make additional payments to the retirees, as discussed above,” the report said.
Additionally, the WRS makes the case that sharing the cost of employer contributions with workers increase payments to the fund “dramatically.”
The report concluded that to help Milwaukee’s two pension plans increase their solvency, they should issue pension obligation bonds, implement risk sharing, make changes to contribution policies, extend the amortization period, and reduce the defined pension benefit.
Another option posed was to simply close the doors on Milwaukee’s plans and transfer its members to the WRS. WRS leaders, according to the report, have repeatedly expressed willingness to consider that option, but only for new employees and future years of service for active employees.
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Tags: COLA, Funded Status, Milwaukee, Pension Plan, Wisconsin, Wisconsin Retirement System