Milwaukee County Pension Madness

Since the turn of the century, Milwaukee County has been shaped by pension scandal.

County Executive Tom Ament resigned due to public outrage over pension enhancements that benefited his top managers. Governor Scott Walker was elected Milwaukee County Executive on a promise to clean up the retirement system, but previously hidden errors provide evidence that he failed. County Executive Chris Abele’s appointees concealed those errors in a 2014 report that was unearthed after the resignation of his pension director, Marian Ninneman, who Abele rewarded with over $15,000 in secret raises since 2015. 

The hidden IRS report at the heart of the latest Milwaukee County pension scandal demonstrates how the current pension system rules might actually incentivize a County Executive with sociopathic tendencies to ignore pension system errors. 

The incompetent oversight of Retirement Plan Services (“RPS”) under both Scott Walker and Chris Abele has been so lucrative that a debt collection scheme to correct errors caused by county staff may have formed the basis of Milwaukee County's $80 million contribution to the Milwaukee Bucks’ new arena.

County Executive Abele’s Role

The purpose of the secret April 22, 2014 letter to the IRS was to provide an updated report of over 800 additional pension errors to supplement Milwaukee County’s 2007 Voluntary Correction Plan (“VCP”), which included approximately 1,500 errors.

The hidden 2014 supplemental VCP was necessary to avoid an IRS audit and to maintain the tax-qualified status of the over $1.66 billion Milwaukee County pension fund.

Although the hidden IRS communication involved at least two of the County Executive’s top appointees, RPS Director Marian Ninneman and Corporation Counsel Paul Bargren, Abele claims to have had no knowledge of the secret correspondence until January 2017, but has also offered no explanation for why his staff would have neglected their duty to notify him of the report.

County Executive Abele claims he requested RPS Director Ninneman’s resignation in January based on her failure to correct a single mistake and not for hiding a report from him that included over 800 pension errors. In fact, Abele approved a 5% raise for Ninneman after he learned that she withheld the report, which followed her $10,837 raise in January 2015 that was implemented without County Board approval.

The secret correspondence was sent on behalf of the Milwaukee County Executive, whose role in the pension system is to ensure that all pension-related ordinances are followed, to appoint an RPS Director, to appoint an HR Director to oversee that RPS Director, and to alert the County Board of any failure by an RPS official to perform a duty or make a report; but Chris Abele claims he was unaware of the April 2014 communication between his appointees and the IRS until January 2017.

Interestingly, just days after the hidden report was sent, Abele unilaterally restructured the oversight of RPS by replacing his Director of Benefits, Matt Hanchek, with Human Resources Director, Kerry Mitchell, as his appointee responsible for overseeing RPS. 

The timing of the switch is significant because Hanchek is yet another Abele appointee that had knowledge of the hidden IRS correspondence. After years serving the Pension Board, Director Hanchek attended his last meeting on April 17, 2014, and left without saying goodbye following a discussion of the hidden IRS communication in closed session. However, Hanchek was never questioned about his knowledge of the secret report due to Abele’s abrupt change in RPS oversight. 

Coincidently, three weeks after the hidden correspondence was sent to the IRS, HR Director Kerry Mitchell reported to the County Board’s Finance Committee to discuss Abele’s plan for correcting errors from the original 2007 VCP filing. When questioned about Abele’s role in the VCP process, Mitchell responded by stating that, “at this point in time, the County Executive is very knowledgable about what is happening, and the complexities of what we’re dealing with.”

2007 VCP Error Corrections

The County Board serves a “settlor” function for the retirement system by setting policy as the pension plan’s sponsor. At the May 2014 Finance Committee meeting, the Board was presented with two options to fix 319 of the nearly 1,500 pension errors from the 2007 VCP: (1) Collect the money that had been paid to retirees, or (2) retroactively change county ordinances to allow affected retirees to keep their past and future pension payments.

County Executive Abele, a billionaire’s son, learned the hard way that a retiree on a fixed income has nothing better to do than fight for their pension. The victims of the pension errors identified in Walker’s 2007 VCP were not notified that their retirement savings were being targeted until 2014. Chris Abele publicly announced his intention to recoup their past pension payments just one day after his top managers notified the IRS that hundreds more errors would require collection.

Many of the affected pensioners had been retired for more than twenty years, some had disabilities, and others were at-risk of losing their homes.

The retirees responded by occupying the County Executive's office to demand an explanation for Abele's plan to collect their retirement savings, with interest, rather than correct errors caused by county staff. Their pursuit of answers even forced Abele to cancel a scheduled appearance at a ribbon-cutting ceremony in Bay View, which also featured Mayor Tom Barrett and County Board Chairwoman Marina Dimitrijevic.

The Pension Board is the pension fund’s fiduciary, which has a legal duty to make the most financially sound decision for its members and beneficiaries, and voted to support the ordinance amendments. The County Board agreed and had to override a veto by County Executive Abele to adopt those retroactive ordinance changes on February 17, 2015.

Though the County Executive’s veto message opposed the correction of errors from the 2007 VCP, it also explains both (1) the Pension Board’s justification for collecting payments associated with the previously hidden errors without seeking guidance from the County Board, and (2) Chris Abele’s preference for resolving pension mistakes by recovering past payments even if the errors caused by County staff were clerical in nature, were caused by conflicts with arcane and reversible ordinances, or did not result in overpayments to affected retirees.

Abele’s memo also explained that Retirement Plan Services already had County Board authorization to act on pension errors based on its 2007 resolution, which established a general policy to authorize the Pension Board to collect retirement payments that are subsequently found to be in violation of state or federal law.

2014 Hidden Error Corrections

Although the County Board adopted retroactive ordinance amendments to correct the 2007 errors, it did not rescind its 2007 resolution. Therefore, the Pension Board was preauthorized to direct RPS to correct the more than 800 errors listed in the hidden 2014 IRS report.

As a fiduciary, the Pension Board had a duty to keep the errors secret to avoid further County Board action, which could have delayed the collection of past pension payments. Such a delay would have harmed the pension fund because a six-year statute of limitations barred pension payment clawbacks, therefore, every day that passed limited the Pension Board’s ability to decrease its unfunded liabilities through debt collection.

The Abele administration did not have a similar fiduciary responsibility, but was incentivized to also hide the secret IRS communication due to the positive impact the collection efforts would have on lowering the County’s annual required contribution (ARC) to the pension fund. An ARC reduction equates to an increase in revenue available for future county budgets.

By moving forward with its plan to resolve pension errors by collecting past payments, the Pension Board obligated the County to reimburse the pension fund for the total amount of targeted payments within 150 days of implementing a debt collection plan, but the County Board was never required to provide funding because that amount was prepaid by Scott Walker when he issued pension obligation bonds in 2009, which were “substantially in excess” of Milwaukee County’s ARC that year.

The County’s ARC, which includes its employees’ contribution, is equal to the normal costs of its pension benefits plus the pension system’s unfunded liabilities. Normal costs are the expected value of the pension credits earned by eligible employees in a given year. The amount of unfunded liabilities includes changes to expected pension investment returns and the positive or negative impact of corrections to pension payment errors.

The Pension Board error collection program was supported by Corporation Counsel, Paul Bargren, an Abele appointee, who authorized RPS to make individual repayment plans with hundreds of pensioners, who were offered a choice to either repay their debt or accept cuts to future pension payments with interest.

That potential budget windfall and the impact of the six-year statute of limitations on pension clawbacks helps explain the previously inexplicable math that formed the basis of Chris Abele’s plan to finance the county’s $80 million commitment to the Milwaukee Bucks’ arena over the next 20 years.

Bucks Arena Financing Plan

Without a dedicated funding source for Milwaukee County’s basketball arena commitment, Abele proposed a unique financing plan that was based on maximizing the collection of county debt by transferring it to the State of Wisconsin, which could utilize its enhanced debt collection powers.

However, Abele’s plan made no sense at the time because only half of the County’s existing debt was eligible to be used for the arena. Of that, 95% of the County’s property tax debts and 79% of its court debts were already collected within seven years utilizing Milwaukee County’s existing collection options.

At best, the County could only hope to collect approximately $9.5 million worth of additional uncollected debt over a ten-year period, a number that would be further reduced by the amount of interest lost on debts that could have been collected with the County’s tools instead of the State’s accelerated collection methods. For example, if the same 95% of property tax debts were collected within four years instead of seven, Milwaukee County would actually lose more than $2.5 million in interest revenue.

After the Milwaukee County Board ignored his debt collection scheme in 2015, Abele lobbied the State Legislature to support his new plan in 2016, which would have given the County Executive’s staff the unilateral authority to determine what debts would be sent to the State for collection. Again, his plan was rejected.

County Executive Abele’s knowledge of additional overpayments explains why he was so desperate to ask the State of Wisconsin to garnish wages and levy the bank accounts of Milwaukee County debtors.

The sum of repayments stemming from the previously hidden pension errors was potentially limited by that six-year statute of limitations, so County Executive Abele acted with urgency to accelerate the debt collection before the debts were uncollectible.

Since the past pension payments were previously included in the pension fund’s actuarial calculations, any amount collected by the County would reduce its future ARC and, thus, lower the requirement in future budgets.

In addition to the past payments collected, any agreements between RPS and individual retirees to cut future pension benefits would also reduce Milwaukee County’s ARC, which would further expand the amount of revenue available to fund the County’s 20-year, $80 million commitment to the Bucks’ new arena.

To Be Continued

Now that the hidden errors are publicly known, we must wait to find out how many pensioners have been harmed and how much money the County stands to recoup by raiding the retirement savings of hundreds of retirees.

County Executive Abele has responded by authorizing an audit, which seeks to identify new pension errors, but he has not directed auditors to investigate the mysterious circumstances surrounding this new scandal.

Chris Abele’s claim that he did not know about the hidden IRS report raises serious concerns about his ability to competently oversee the Milwaukee County pension system.

If the County Executive was truly unaware of the hidden report, despite his admitted knowledge of the errors within it, Abele acted negligently and put the pension fund’s tax-qualified status at-risk by failing to promptly report those pension system failures to the IRS. If he did know about the report, County Executive Abele is lying to the public.