Searching for pension solutions

As state, local and municipal governments confront the reality of huge losses in their pension fund assets and grimly assess the impact on future budgets, many will pursue innovative or even radical solutions, including some that likely never would have seen the light of day in ordinary times.

Out of Pittsburgh, for example, comes word in the Pittsburgh Post-Gazette of a proposal by Mayor Luke Ravenstahl to lease the city's 11 downtown parking garages, and perhaps its parking meters and neighborhood lots, in order to generate cash to pay down a large chunk of the city's $600 million unfunded pension liability.

The article notes a significant potential downside: a large increase in downtown parking rates. The mayor responds, however, that while he would like to "protect parkers", he must look out for "city taxpayers and pensioners" first. He goes on to add that while it is uncertain this effort will be successful, a parking lease could be "another piece of the ultimate...plan for the long-term legacy costs for the city of Pittsburgh."

Here in Milwaukee, meanwhile, the news keeps growing worse for the county's pension fund. Poor investment returns have reduced the market value of the fund by more than $500 million during the past year, and the unfunded liability now stands at more than $900 million.

Even if the county proceeds with its plan to issue Pension Obligation Bonds (POBs) - which a report before the Finance and Audit Committee next week indicates is still on track (see a previous blog post on POBs here) - that would only cover about $400 million of the outstanding liability, leaving the fund still vastly underfunded. In fact, the combination of POB debt service and costs associated with current and future pension fund liabilities could require an $80 million contribution in the county's 2010 budget, which is $32 million more than the amount allocated in 2009.

Will Milwaukee County officials respond with a plan for their long-term legacy costs and might such a plan involve selling, leasing or otherwise identifying new ways to make money off existing assets? During 2009 budget deliberations, the county board showed little interest in that approach, rejecting a proposal to study a long-term lease for General Mitchell International Airport, and also rejecting much smaller initiatives to lease the O'Donnell Park parking structure and install parking meters on Lincoln Memorial Drive.

Whether these types of strategies are the best or only options for the county certainly is debatable. As we have blogged previously, asset sale and lease proposals should be held up to a rigorous litmus test to ensure the public interest is served. The Chicago Tribune also has reported that Chicago's fascination with asset sales and leases has driven up costs for consumers.
But desperate times do call for desperate measures, and an $80 million pension payment in next year's budget certainly qualifies as desperation time for Milwaukee County. Selling or leasing county assets may or may not be a practical and correct answer, but with several months to go before the 2010 budget process begins, it is critical that this and other creative options at least be discussed as part of immediate bi-cameral planning for another substantial pension hit.

MPS: What's the problem?

You've probably read or heard quite a bit lately about the need for solving MPS's problem. That sentiment is unlikely to draw opposition. However, we're not all on the same page as to what the problem is exactly.

Is it a governance problem? A finance problem? An achievement problem? Many would say all three. At least one local education blogger, Jay Bullock, feels we've got to pick our problem:

The Milwaukee Public Schools face two intractable crises, concurrently. There is the crisis of finances, and the crisis of achievement. One fact is clear: We cannot solve both.

Mayor Barrett seems to feel the same, as the audit he calls for focuses on the fiscal issues, leaving instruction out of the picture. Gov. Doyle supports the audit and seeks its results prior to releasing his state budget, implying that finances are the first issue to tackle.

Meanwhile the editorial board of the Milwaukee Journal Sentinel has called for governance change.

The federal No Child Left Behind Act, in contrast, is aimed at the achievement problem in MPS and other districts, and frankly, because it compels the district to meet its requirements or risk losing federal funds, it has the focus of the district itself.

Is there no way to holistically approach the many facets of the MPS problem? New commentary in Education Week by three professors with the Center on Reinventing Public Education argue that there is a way to address these problems simultaneously: policymakers and district administrators should be focused on "productivity." Instead of pruning around the edges by cutting teacher's aides or football programs when in a fiscal crisis, districts should analyze which instructional programs bring them the biggest bang for their buck and cull those that aren't cost-effective. Perhaps those new laptops didn't have any impact on student learning--well, then, cancel the plans to buy more for every school. Perhaps a full-time arts teacher is associated with higher attendance rates--maybe arts shouldn't be the first thing to go in a budget crunch.

Focusing on productivity may seem like a good idea, but, as the proponents themselves concede, it is nearly impossible to do in most districts. Not only is there the universal difficulty with measuring learning quantitatively, but district budgets are not fashioned in a way that would allow administrators to put a price tag on specific educational programs. For example, what are the costs of the MPS learning targets (the curricular goals) at each grade level? If they aren't working, how much would it cost to revamp them or to implement a different program? Those questions are unanswerable with the current budgeting process. If learning targets aren't improving instruction, you won't see the consequence at budget time. What you will see are changes in busing routes, switching to compact fluorescent light bulbs, and other items for which the cost-benefit analysis is much easier to calculate.

Unless we can agree on the problem to be tackled, there is no chance of reaching consensus on a solution. If we can somehow agree that we are capable of resolving the financial and achievement crises simultaneously, then we will need to agree that the district's current budgeting process should be redesigned so that effectiveness in the classroom can somehow be evaluated. A governance change ushering in new administrative leadership might be one way to implement that type of procedural reform, but probably isn't a necessity to do so. What is for sure, however, is that arguing about the "right" problem to solve wastes time, money, and kids' opportunities.

The housing crash and your property tax bill

Milwaukee seems to be weathering the housing crisis relatively well. Foreclosure rates in 2007 in metro Milwaukee were lower than in most other metro areas and housing prices in metro Milwaukee, alone among the largest 25 cities in the country, rose between Oct. 2007 and Oct. 2008. Other more current indicators, however, are more troubling to local homeowners.

The Milwaukee Rising blog of former Journal Sentinel reporter Gretchen Schuldt has analysis of the weekly home sales reports in the Sunday Milwaukee Journal Sentinel, comparing the sales price to the assessed value of each property. The most recent week analyzed has sales prices in the City of Milwaukee averaging 35% less than assessed value. The prior week averaged 43% less than assessed value. What makes these numbers especially troubling is that Milwaukee's assessments are as current as possible; the City reassesses property values annually as of Jan. 1.

While these low prices are a bargain hunter's dream, they are a mayor's nightmare--declining market values will drive down assessed values. For most of the past eight years, increases in assessed values have allowed the City to enjoy growth in the tax levy without raising tax rates. If home sales are routinely below assessed value in 2009, then assessments will be reduced, causing the city to either slash costs to accommodate a smaller levy or raise tax rates to maintain or grow the levy.

Increased tax rates would seem likely, but cuts in services will be considered as well. Milwaukee homeowners may soon feel the triple whammy of lost value, higher taxes, and fewer services.

Stimulus or no stimulus, Milwaukee County needs an infrastructure plan

Milwaukee County Executive Scott Walker's statement (as reported in today's Journal Sentinel) that he will not request federal stimulus funds already has generated considerable reaction from other elected officials and in the blogosphere, and likely will continue to do so. While taking sides in the ideological debate over the need for and composition of a stimulus package is not the purpose of this piece (see previous Milwaukee Talkie blogs on stimulus here and here), my two cents - based on the Forum's previous research on county government - is simple: something must happen soon to address Milwaukee County's pressing infrastructure needs.

Our report last May on the county's transit funding crisis outlined how the imminent need to purchase 150 new buses (at a cost of approximately $56 million) could soon require the county to reduce transit service by up to 30%. Meanwhile, our analysis of county-owned parks and cultural institutions concluded that:

Major maintenance and basic infrastructure repair needs are significant and growing at each of the county-owned assets, with the exception of the Milwaukee County Historical Society headquarters, which is in the final stages of a major renovation. Among the more significant deferred maintenance/infrastructure needs assessment totals are $10 to $15 million for the Milwaukee Public Museum, $5.5 to $8.5 million for the Milwaukee County Zoo (plus a $130 million capital improvements wish list), and $276.6 million in the Milwaukee County Parks.

Many are quick to blame the county executive's position on tax increases for these infrastructure backlogs. A far less commonly understood and perhaps more important contributor, however, is the 2003 decision made by both the executive and county board to cap annual debt issuance for capital projects at approximately $30 million per year.

That decision was predicated on an equally important decision made that year to refinance approximately $100 million of long-term debt. The refinancing plan was structured in a manner that provided a significant near-term reduction in annual debt service payments (in order to generate operating budget relief), but that caused a spike in those payments in the out years. County policymakers prudently recognized that failure to control new debt in the interim would cause significant long-term problems, so they instituted an annual bonding cap. Today, an area of county fiscal affairs that is praised by bond rating agencies is its sound management and rapid repayment of its debt.

The catch, however, is that the policy to limit annual capital bonding did not necessarily reflect the county's infrastructure needs, was not accompanied by an analysis of those needs versus the resources available, and did not result in a plan to address the mismatch. That remains the problem today.

Are federal stimulus funds the solution to that problem? Probably not, given the depth of the county's needs and the uncertainty as to whether those needs even would be eligible for stimulus dollars.

But those who are taking options off the table that could at least help - and this goes for the county executive with regard to stimulus funds as well as supervisors who have rejected analysis of a sale or lease of General Mitchell Airport and closure of county pools - have an obligation to specify the realistic solutions they have in mind to comprehensively address the county's infrastructure needs and the legislative strategy they intend to pursue to implement those solutions.

Whether it's addressing the county's infrastructure repair backlog, solving its transit funding crisis, or figuring out how to fix or replace its aging mental health complex, it is time for less politicking and more real and honest consensus-building and planning.

An economist's take on Brett Favre and municipal budgets

In economic theory there's a notion called deadweight loss, or market inefficiency, which impacts a consumer when the value of an item's utility is less than the price paid for it. What does that have to do with Brett Favre? According to Stephen Dubner, one of the co-authors of Freakonomics, people who bought Brett Favre Jets jerseys earlier this football season are likely experiencing deadweight loss now, as Favre failed to get the Jets into the playoffs.

Dubner asks:

So how do all those people who paid $80 for Favre Jets jerseys feel today? Do they wish they’d spent their money elsewhere? How much would they pay for the same jersey today? Did they derive $80 worth of pleasure from it up to this point — i.e., was the thrill of the first two-thirds of the season worth the pain of the last third?

But this a particularly New York point-of-view (Dubner is a reporter for the New York Times). Here in Wisconsin, the question to Packer fans should be: Was it worth $80 to see Brett play one more season? (Or, for some Favre fans: Were you thinking it would be worth $80 to wear a Favre jersey and cheer the Jets during playoff season in protest of the Packers letting him go?)

But the concept of deadweight loss applies to more than expensive football jerseys. It is a concept that can apply to budgeting decisions as well. For example, what is the true price when the county keeps swimming pools open, but no one comes to swim? Arguably, the county's costs of maintaining and operating the pools are compounded by the deadweight loss in value due to the non-swimming taxpayers. In another example, MPS spent over $100 million to build and remodel neighborhood schools that now have classroom after classroom of empty desks--parents obviously don't value these schools to the extent the district anticipated they would. A final example, from the city's budget: what's the true price of a citywide free wi-fi network failing after the vendor discovers there's no money to be made in it? The risk of deadweight loss in this case was transferred to the vendor, but taxpayers with patchy wi-fi coverage were still the ultimate losers.

Favre fans are likely to recover their loss when Brett retires and is inducted into the football Hall of Fame; his one-season Jets jersey will become a collector's item. Local taxpayers, on the other hand, will find themselves continuing to struggle under the deadweight of lost value when short-sighted or uninformed budgeting decisions continue.