A Different Angle on POBs

The momentum behind Milwaukee County's push to issue Pension Obligation Bonds is growing. The Legislature is poised to act on bipartisan legislation that will allow the County to issue 30-year POB's, while also requiring an annual five-year fiscal plan to demonstrate its ability to pay the debt service and any remaining pension liabilities.

A lot has been made of the potential risk to the County, which would essentially be betting that the investment return generated by the Pension Fund would exceed the interest it would pay on the bonds. As an op-ed in yesterday's Journal Sentinel by Sheldon Lubar and Chris Abele correctly notes, the recent precipitous drop in interest rates makes this an opportune time to place that bet.

But one of the untold stories behind the County's potential use of this financing mechanism is the added stability it would bring and what that means. By issuing debt to pay off unfunded pension liabilities, the County would lock itself into a fixed level of debt service payments for the next 25 to 30 years. Depending on your point of view, that could be a good thing or a bad thing.

From a fiscal watchdog perspective, there is perhaps no bigger selling point associated with POBs. For years, County policymakers in both the Executive's office and the Board have been able to generate short-term budget relief by challenging, changing or ignoring the actuarial recommendation that is supposed to determine how much property tax levy the County dedicates to its unfunded pension liability in a given year. In fact, one former County Executive generated a $10 million budget savings several years ago simply by convincing his appointees to the Pension Board to change some of the actuarial assumptions.

Such maneuvering would be impossible for the liability covered by the bonds, as debt service and interest payments are fixed. Not only would this discourage gimmickry, but it would also ensure predictability, which is essential for long-term fiscal planning.

It should be noted, however, that one man's fiscal responsibility can be another man's unrealistic and harmful rigidity. Locking a fixed POB payment into the County's long-term budget increases the pressure on areas of the budget that are not locked in, such as parks, culture and transit. Indeed, a group of union and social services advocates argued during County budget deliberations two years ago that the County should not slash services simply to meet an actuarial projection that may or may not pan out over the next 30 years.

It may be that the County will end up with both accountability and a small degree of flexibility by issuing bonds to cover only part of its currently projected unfunded liability. That was the plan presented by the County Executive in his 2008 budget, and that may end up happening by default if the POB amount is based on last year's actuarial calculations, which would fail to account for a market downturn that appears likely to increase the liability this year. The final POB issuance amount will be determined later this year by County fiscal officials and policymakers as they consider the actual financing structure, assuming legislative approval is forthcoming.