Public Policy Forum Blog

Is a billion-dollar liability something to cheer about?

My guess is that the headline in today's Milwaukee Journal Sentinel proclaiming that Milwaukee Public Schools unfunded retiree benefit costs "fall to under $1 billion" leaves most citizens scratching their heads. Is a long-term liability that still stands at $997 million something to celebrate, or should taxpayers be highly unnerved?

The answer is probably a little of both. We first noted the remarkable progress the district had made in reducing its retiree health care liability in Passing the Test, But Making the Grade?, a comprehensive analysis of the district's finances we conducted five years ago.

At the time, we noted that changes to health care plan design and increases in employee contributions had cut the long-term retiree health care liability in half (from $2.8 billion to $1.4 billion) and freed up about $35 million annually to direct to the classroom. We also warned, however, that MPS' leaders would need to "build on recent progress and vigorously counter immediate revenue challenges with substantial (additional) reductions in fringe benefits spending made possible by Wisconsin Act 10."

The news that the liability has now fallen to under $1 billion is evidence that they have done so and should further reinforce our conclusion that MPS' leaders – at least in recent years – have been acting responsibly to "right their financial ship." Also, the fact that MPS has been building a reserve by socking away a 5% "prefunding" payment each year is further cause for reassurance. That is something, incidentally, that neither the City of Milwaukee nor Milwaukee County have been able to do, despite their similar-sized retiree health liabilities (the City's stands at about $976 million and the County's at about $973 million).

Yet, as with so many positive developments on the local government finance front in Milwaukee, this news also must be viewed with caution.

First, it is important to note that a nearly $1 billion retiree health care liability still poses a substantial financial challenge to MPS, particularly in light of its ongoing revenue challenges that result from declining student enrollment and uncertain support from the State. According to the district's most recent actuarial report, its annual employer contribution to retiree health care still is $62 million, and that amount will increase to $75 million by 2025.

In fact, health care, in general, remains one of MPS' foremost fiscal challenges. In our 2017 MPS budget brief – released last May – we noted that this year "marks the end of five consecutive years of falling fringe benefit expenditures," a development that will "produce ongoing challenges in light of the district's flat revenue streams."

Much like the City and County, health care savings have been a recent budgetary savior for MPS, as the ability to reduce health care expenditures in annual budgets has freed up resources for other needs that otherwise might not have been met because of limited revenue growth. Now that health care costs for both active employees and retirees will begin to grow again, the district is losing one of its primary tools for shoring up classroom expenditures.

So what is a confused Milwaukee resident to think? Perhaps MPS' chief human resources officer put it best when he told the Journal Sentinel that "we still have work to do, but we are headed in the right direction."      

Author: 
Rob Henken