Huge pension payment looms over future city budgets
Milwaukee officials wrapped up the 2020 budget recently, but they’re already using words like crisis, catastrophe and draconian to describe what might be coming in future deliberations.
A huge anticipated jump in the city’s annual pension contribution — perhaps more than $100 million — may dwarf the angst felt this year in cutting 60 police officer positions.
“For a city with the level of poverty we’ve had, we’ve had a really good credit rating and we manage our finances well,” said Ald. Michael Murphy, who served for years on the pension board. “But this will probably be one of the most significant challenges the city is facing in its last 50 years.”
The pension board, which doesn’t answer to the Common Council or the mayor, oversees the city’s $5 billion retirement fund.
In 2023, the city’s actuary estimates, Milwaukee’s annual pension contribution could more than double, from about $70 million to about $190 million. The city budget office, using a different set of assumptions, still put the 2023 sum at about $160 million.
For scale, the entire 2020 tax levy is about $291 million.
The projected spike in the annual contribution is driven by a drop in the anticipated future earnings on the city’s pension fund, from 8.24% to 7.5%; a -3% return in 2018, when the expected rate of return was
8%; and accruing interest on the unfunded liability.
Both estimates assume that the markets hold, said Jerry Allen, executive director of the Employes’ Retirement System. And although there’s been a decade-long bull market, those don’t last forever, he said.
“Just like winter follows summer, bear markets follow bull markets, it’s just the way of it,” Allen said. “And we don’t know when they are coming, but we are certain they will occur at some point in the future.”
Although the exact amount of the annual contribution has yet to be determined, the jump is expected to be significant, and if nothing changes, city officials predict there will be service cuts.
“What those actual service cuts are we’re not sure at this point,” Budget Director Dennis Yaccarino said. “But given the magnitude, they would likely hit almost all areas of the budget.”
Mayor Tom Barrett said in September that the anticipated jump in the pension contribution was one of the drivers of the 2020 budget, along with state-imposed limits on methods for raising revenue, rising costs of providing services and flat shared revenue payments from the state.
The 2020 budget put $8 million into the pension reserve fund, an effort to begin saving for the jump between 2022 and 2023.
The budget also included a cut of 60 police officer positions through attrition. Police Chief Alfonso Morales said during budget deliberations that such a decrease would take the department to the lowest sworn level in two decades.
The annual sum city officials seek to put into the pension reserve could grow in the next few budgets. A plan by the city’s budget office calls for setting aside more than $20 million in 2021 and more than $30 million in 2022, based on the office’s current projections.
In its analysis of the city’s 2020 budget, the nonpartisan Wisconsin Policy Forum said the city was prudent to set aside funds in advance.
However, “it is clear that the need for such a vastly increased employer contribution ultimately could cripple the city’s use of the property tax levy for general services unless steps are taken to somehow avoid such a steep increase,” the report states.
Despite the significant headwinds, Barrett said he remains optimistic about the city’s prospects .
Among his hopes: That the state Legislature will allow the county to hold a binding referendum asking voters to approve a 1% sales tax, and that voters will approve it in April.
“We need to really get this coming to a head by January, so the clock is ticking. ... If that doesn’t happen, what happens to the 2021 budget? And I’m going to do everything I can, clearly, to maintain the current positions in the Police Department, but what gives then? Do we not put the additional dollars in for the pension? I would prefer not to do that because I think that just makes that cliff in 2023 a more severe cliff,” he said.
Common Council President Ashanti Hamilton said the city won’t be able to meet the pension obligation without the state giving the city the ability to diversify its revenue streams and raise resources.
“We are having that debate right now of literally keeping the lights on, the streetlights,” Hamilton said of a debate in this year’s budget deliberations over the amount of time streetlights are lit. “That should be a sobering reality for residents here and especially for those that represent the city of Milwaukee at the state level. We have to do something different.”
He said the city has been very responsible with its use of resources but that the obligations facing the city can’t be sustained through the traditional funding structure.
Hamilton said the sales tax proposal is one of the most realistic and most well thought out opportunities available right now. He said if legislators in Madison care about public safety, infrastructure and the city being the “economic engine” of the state, they need to consider that and other options.
Officials estimate the tax could bring in as much as $160 million to the county in the first full year. How those funds would be divided between the county and municipalities is in flux.
The proposal is widely regarded as facing an uphill battle in the Republicancontrolled Legislature.
State Rep. Joe Sanfelippo, one of seven Republican state legislators who in Octobersent Barrett and Common Council members a letter decrying the proposed cut in police positions, said Milwaukee needs to reevaluate how it is spending its resources.
Sanfelippo, of New Berlin, represents a district that includes a portion of western Milwaukee County.
He charged that other municipalities’ leaders are making difficult budget choices but Milwaukee leaders prefer to tax residents instead.
“Is it great to have that trolley? They think so,” he said, referring to the city’s streetcar. “That’s wonderful, but you can’t keep doing things you can’t afford and keep going back to taxpayers and raise their taxes more and more.”
The streetcar, known as The Hop, is financed through tax financing districts that draw their revenue from newer downtown-area developments. The Hop is not financed with revenue from Milwaukee’s citywide property tax base.
Barrett also said he sees the Wisconsin Retirement System as a “model of success.”
“I want to really dig deeply to see what it is that makes it so good and how we can make changes that bring us more in line with what the state is doing,” he said.
The city’s fire and police sworn personnel — past and current — make up a significant portion of the total anticipated pension costs.
Mike Bongiorno, president of Local 215 of the Milwaukee Professional Fire Fighters, said the city has an “outstanding” pension system, pointing to findings of The Pew Charitable Trusts.
The union considers itself a partner with the city and takes the city’s financial challenges seriously, he said. And Local 215 is willing to work with the city to diversify its revenue streams, including the sales tax effort.
But, he said, the city’s budget can’t be balanced on the backs of police and firefighters.
He said the Fire Department has already been cut too deeply.
Milwaukee Police Association President Shawn Lauda declined to comment for this story, citing ongoing contract negotiations with the city.
Contact Alison Dirr at 414-224-2383 or adirr@jrn.com. Follow her on Twitter @AlisonDirr.