Milwaukee Tax and Pension Deal a Step in the Right Direction
The City of Milwaukee and Milwaukee County are set to close their underfunded pension funds and join the Wisconsin Retirement System (WRS), a long-awaited move designed to shore up workers’ pensions and better manage taxpayer funds. The change comes after state lawmakers this year enacted a comprehensive overhaul to the way Wisconsin provides financial support to local governments. Known as Act 12 and approved with bipartisan support, the law included a special provision authorizing the city and county to raise new revenue, primarily for pension debt reduction, on the condition that they stop enrolling new hires into expensive local pension plans—the City of Milwaukee Employees Retirement System (CMERS) and the Employees’ Retirement System of the County of Milwaukee (ERS). Instead, workers hired after Jan. 1, 2025, will become members of the more cost-effective WRS.
Transitioning to the WRS is a significant development for Milwaukee because the CMERS and ERS regularly leave taxpayers on the hook for costly pension payments. Meanwhile, the WRS has bucked the national trend and maintained its fiscal health through stringent contribution requirements and a more even risk-sharing model between Wisconsin’s state and local governments and their employees.
For years, the city and county have explored options to reform their systems and manage the effects of rising pension costs on annual budgets. Task force reports issued by Milwaukee County in 2018 and the City of Milwaukee in 2021 both identified joining the WRS as a leading option for reducing exposure to future unfunded liabilities and further cost increases over the long term.
The interest in changing Milwaukee’s approach to providing retirement benefits to firefighters, police officers, and other city and county workers was largely driven by the emergence of unfunded pension liabilities during the mid-2000s. In the early 2000s, both the CMERS and ERS were fully funded and required minimal contributions from the city and county. However, funding levels subsequently declined due to a range of factors, most notably the Great Recession of 2008 and 2009. During this time, investment returns fell short of assumptions, leaving Milwaukee taxpayers to cover the tab.
After a decade and a half of trying to right the ship, the county’s ERS plan is still just 73 percent funded on a market value basis while the city’s CMERS plan is just 78 percent funded, leaving taxpayers to cover the shortfall. What’s more, the plans are scheduled to become more costly over the next five years.
This storyline of fully funded pension plans developing significant unfunded liabilities is not unique to Milwaukee. On a national basis, public plans in aggregate were fully funded in the early 2000s and now stand at approximately 77 percent funded due to a combination of investment underperformance, insufficient contributions, unfunded benefit increases and assumption changes. Between 2007 and 2020, total contributions from public employers grew by 7 percent per year in an attempt to offset the historical losses and fully fund benefits moving forward.
One notable exception to this trend was the WRS, which maintained stable funding levels and contributions requirements while experiencing the same turbulent market volatility as the other funds. The WRS—which provides retirement benefits to employees of the state and all other Wisconsin local governments except Milwaukee city and county—is approximately 99 percent funded and has a long history of stable and affordable employer contributions.
The WRS achieves these results by sharing costs equally between employers and employees, using conservative assumptions—such as a 6.8 percent assumed rate of return that is below the national average—and designing the benefit structure so that it automatically adjusts based on market conditions and plan funding levels. In combination, these features serve to make regular small adjustments that keep the plan on target through all cycles of the market.
As the city and county explored solutions for their ongoing pension challenge, the decision to join the industry-leading WRS emerged as the clear choice. But the decision comes with a meaningful tradeoff: near-term costs actually increase when the CMERS and ERS plans are closed.
The recently passed legislative fix, Act 12, requires Milwaukee to calculate the CMERS and ERS unfunded liability according to strict guidelines. As a result, while costs would be lower for new employees joining the WRS, an independent actuarial analysis of Act 12 confirmed that contributions by Milwaukee to current employees’ and pension recipients’ plans would go up.
To address the short-term cost increases associated with the plan closures and Milwaukee’s already strained finances, Act 12 authorized a local sales tax increase—bringing the combined state and local sales tax in Milwaukee from 5.5 percent to 7.9 percent. The authority to impose the tax is conditional upon on each jurisdiction joining the WRS, and the law requires the taxes to be repealed once the closed plans achieve full funding within 30 years. Both the Milwaukee Common Council and the Milwaukee County Board approved the taxes earlier this summer, setting the stage for new hires to enroll in WRS starting in 2025.
While Milwaukee taxpayers are right to grumble about a tax increase, the city and county’s pension mismanagement eventually had to be addressed. Joining the WRS, one of the best-funded pension programs in the country, greatly reduces the risk that taxpayers will be once again saddled with outstanding pension debt in the future. It will take time, but future Milwaukee leaders and residents will reap the benefits of this decision in the decades ahead.