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.

The Never-Ending Budget Process

Who among us doesn't despise this time of year - the time when football has ended, spring training hasn’t started, winter has stretched on too long and spring can’t come soon enough?

Leaders in government, that's who. This is the time when governmental chief executives, from the President on down, deliver “State of” speeches, setting forth a series of new issues and priorities to develop and debate. With a new budget in place and preparation for the next one still a few months away, it’s the time when government officials can evaluate, cogitate and develop big ideas for the year ahead.

Or is it? Here in Wisconsin, after a grueling eight-month State budget debate that ended just a few months ago, the governor and legislature now face the prospect of fighting the same fights all over again in order to address a $400 million budget hole. In fact, the Associated Press reports the governor wants this hole filled before the legislature adjourns in March.

At the county and municipal level, meanwhile, budget officials already deeply concerned about how the economic downturn will impact their tax and fee collections now face the prospect of re-opening their budgets if the State decides to share its pain by cutting into local aids.

For years, the Public Policy Forum has urged local governments to plan strategically and develop long-term fixes to structural budget problems. Unfortunately, such planning takes time and resources that most governments can’t muster when top fiscal staff are consumed with never-ending annual budgeting.

What can be done about this? One obvious solution is for State and local governments to establish sufficient reserves and “rainy day funds” that will prevent unanticipated lags in revenue collections from necessitating mid-year corrections. Of course, that’s easier said than done.

Another is to establish the type of budgeting philosophy and framework that lends itself to making difficult budget decisions – even those that occur mid-year – in a thoughtful, logical and timely manner. Authors David Osborne and Peter Hutchinson, of the Government Finance Officers Association and others have been pushing an approach referred to as “Budgeting for Outcomes”, described by GFOA as follows:

The contrast between traditional budgeting and the Budgeting for Outcomes approach is stark. Rather than having the starting point be what was funded by departments in the previous budget, the starting point becomes what results the jurisdiction wants to achieve. The budget office works with results teams to identify activities and programs most likely to achieve results rather than on cutting budgets. Elected officials spend more of their time making decisions on how much revenue citizens can afford to provide and on choosing results and less time on deciding how much money to cut from the budget and where to cut. The incentives for agencies and departments change from making it difficult for the budget office to find places to cut their budgets to figuring out what activities work best to achieve results and how to provide those activities at lower cost.

The wrong approach to bridging a deficit is the across-the-board strategy, in which cuts are doled out among departments and services on an equal, percentage basis without regard for priorities, performance or consequences. Unfortunately, that’s particularly likely to happen when mid-year cuts are required, as few policymakers wish to revisit the difficult budget debates that had just concluded.

That’s where Budgeting for Outcomes comes in. If the annual or bi-annual budget is based on a strategic framework that recognizes and identifies the top priorities for the government, and that allocates resources based on anticipated results, then budget-cutting becomes more of a science than an art. It may not make the cuts any less painful, but at least it makes them logical and, ideally, apolitical.

Of course, developing such a framework requires time and resources from top budget officials, who every year must deal with mid-year budget crises, which then renders them too busy to work with elected officials to develop priorities…