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Milwaukee County Pension Déjà Vu

Fake crisis and real chaos threatens the livelihood of retirees

May. 9, 2017
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County Executive Chris Abele has taken another page from Donald Trump’s playbook by manufacturing a crisis to distract from his own ongoing issues.

These issues began when Abele’s Director of Retirement Plan Services (RPS) Marian Ninneman was essentially forced to resign, despite her solid reputation for improving the quality and accuracy of the pension system. These issues continued when County Supervisor Sheldon Wasserman successfully championed a study to consider transferring Milwaukee County’s Employees’ Retirement System (ERS) to the State of Wisconsin’s retirement system, which is run quite well. It was then accelerated again when interim RPS Director Amy Pechacek resurrected pension errors that were apparently resolved years ago. The Abele administration then repackaged this information into evidence of ERS’ volatility today.

These moves created a “crisis” to justify Abele’s boldest action yet—to use the unilateral contracting authority no one knew he had to target disabled retirees and the surviving families of deceased retirees.

 

What’s With the 2012 Audit?

When a 2012 county audit revealed significant pension errors caused by his predecessor as county executive, Scott Walker, Abele immediately took responsibility for reforming ERS. He credited Ninneman for discovering many of the errors, but publicly questioned the Pension Board’s private auditor, Baker Tilly, for its 2010 and 2011 audit reports, which found no material errors.

The errors identified in the 2012 audit formed the basis of the 2014 IRS voluntary correction plan (VCP) that was somehow supposedly hidden from the County Executive and the County Board, as well as the public, until January 2017. By keeping the report hidden, the Abele administration officials empowered the Pension Board and RPS to set up debt collection plans with individual retirees affected by the errors without County Board intervention or public outcry.

The pension errors within the VCP included both underpayments and overpayments. Underpayments were resolved by reimbursing affected retirees and adjusting future payments. Overpayments were resolved by cuts to future pension payments or through direct debt collection.

RPS and the Pension Board were able to move forward, correcting payment mistakes without requesting funding from the County Board, because Milwaukee County exceeded its required pension fund contributions by $400 million over the last decade. This added a “tremendous layer of security” to the fund, according to RPS actuary Buck Consulting. That surplus is a result of the proceeds of pension obligation bonds (POB) issued by Scott Walker in 2009. A wise refinancing decision in 2013 by the County Comptroller’s office increased the projected value of the POB.

The POB proceeds have been used to reimburse any underpayments and the full amount of overpayments sought in debt collection actions. The underpayments and overpayment reimbursements are essentially prepaid, as explained by Abele in 2012 when he stated that $300,000 worth of underpayments would come at no cost to Milwaukee County.

 

The 2017 Audit

Under Ninneman, RPS continually reviewed past pension calculations and discovered numerous small individual errors. After the 2014 IRS plan was uncovered in January 2017, Abele’s response was much different than his statements when the errors in the hidden VCP were first revealed in 2012.

In 2012, Abele credited Ninneman for doggedly identifying and correcting pension errors that were overlooked by county auditors. In 2017, Abele forced her to resign amid the “scandal,” which was based on the 2012 errors she discovered.

Former County Supervisor Gerry Broderick praised Ninneman’s work and criticized the county executive’s decision, saying that she “excelled in her role as RPS Director and was particularly diligent in correcting flaws in that system that had gone undiscovered for decades, right up until Mr. Abele threw her under the bus. Her departure is a sad loss to our county government.”

As early as January 2016, Ninneman recommended that the Pension Board seek an “impartial third party” to audit the pension system. However, in March 2017, the Abele administration in their usual practice to avoid competitive bidding, entered into a no-bid contract with Baker Tilly, the current ERS auditor that had been scolded by Abele in 2012.

The Baker Tilly contract is worth up to $640,000 and includes whopping $120 per hour fees for clerical work. The County Board did not review or authorize the contract. The Pension Board had no authority to enter into a professional services contract without the transparent RFP process required by Milwaukee ordinances. This did not occur. Instead, Abele utilized a novel interpretation of his county property sale powers to unilaterally enter into the no-bid contract with Baker Tilly.

Coincidently, Corporation Counsel Margaret Daun provided an opinion to the County Board in March, which explains that the law that provides Abele with broad authority over county property sales also empowers him to unilaterally enter into professional services contracts related to ERS for any amount or purpose without legislative approval unless the agreement is for a term beyond one year.

The Baker Tilly contract terms make it clear that interim RPS Director, Amy Pechacek, is targeting two categories of retirees, disabled pensioners and the surviving families of deceased retirees. A total of 570 unidentified pensioners are being targeted; 94% of those retirees earned their pension due to either disability or the death of a family member.

 

The Big Mistakes

The Pension Board’s private actuary, Buck Consultants, was apparently responsible for the two largest pension errors during Ninneman’s tenure. In both 2013 and 2014 the firm missed a routine cost of living adjustment (COLA) in its actuarial valuations, which reduced Milwaukee County’s annual required contribution by approximately $20 million total in its 2015 and 2016 budgets.

The first COLA mistake occurred in May 2013. It seems unlikely that Buck Consultants would have simply forgotten a routine COLA adjustment at that time because only months earlier, in February 2013, the firm was sued by the City of Providence, R.I., for similarly forgetting COLA adjustments for an entire year.

It’s even more questionable that Buck Consulting attempted to limit its contractual liability to $1 million in October 2013. After continued negotiations with Ninneman, Buck ultimately refused to accept another contract with Milwaukee County as of February 2014 unless RPS agreed to its liability cap. RPS accepted Buck’s terms on a month-to-month basis. Curiously, the second COLA mistake occurred in April 2014.

Buck Consulting’s errors had the effect of expanding the revenue available in the 2015 and 2016 County Budgets by approximately $20 million. Since hundreds of millions worth of POB proceeds are available to cover that required contribution shortfall, there is no additional cost to the county because payments are already made in the form of POB debt service, which will cost taxpayers over $33 million annually until 2023.

At an April 13 meeting before the County Board Finance Committee, Benefits Director Matt Hanchek proposed what was essentially a three-year $300,000 pool of cash for Buck Consulting. The resolution was extremely vague and included minimal information on Buck Consulting’s duties under the contract.

Hanchek began his comments to the committee by requesting that his proposal be rejected due to “unfortunate timing.” Although it is implied that he was referring to the ongoing pension issues or Abele’s manufactured pension crisis, it is probably more likely that the rejection was recommended due to the recent revelations about Abele’s contracting authority, which empower his administration to ignore legislative oversight for most County contracts.

 

A Reasonable Solution?

Just as Milwaukee County can utilize pension obligation bond proceeds to refund underpayment errors, reimburse overpayments targeted for debt collection and fix actuarial mistakes at no additional taxpayer cost, a fair solution would be for the county to forgive all past pension overpayments based on the errors caused by its staff.

Despite Abele’s authoritarian powers, the County Board remains the policymaker for the ERS pension fund. The board can vote to repeal its 2007 overpayment resolution and replace it with a humane policy demonstrating respect for the livelihoods of disabled retirees, the families of deceased workers and all pensioners in Milwaukee County.

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