At some point, the liability must be paid or benefits must be scaled back.
In recent months, local governments across Southeastern Wisconsin have found themselves the subject of criticism on several fronts for the improper use of taxpayer money. An investigative series by the Milwaukee Journal Sentinel concluded Milwaukee Public Schools (MPS) wasted over $100 million on the Neighborhood Schools Initiative, which intended to build new classrooms in hopes of luring inner city school children to stay close to home for school. A Milwaukee television station uncovered the fact that Milwaukee County was handing out millions of dollars in flood relief money to residents that had no flood damage. In 2003, Milwaukee County famously ousted their county executive after it was found he was directing millions of dollars worth of pension and retirement benefits to his cronies.
Yet despite these very public embarrassments, local governments in Wisconsin face a far greater threat- one that threatens to make these fiscal missteps look like ripples in the pond that will eventually drown their respective budgets.
According to local government annual finance reports, 27 local governments in Wisconsin are saddled with a combined $6 billion unfunded liability to pay for “Other Postemployrnent Benefits” (OPEB). Oftentimes, as part of their employment packages, local governments offer to pay health benefits for retired employees. Until now, local governments paid what they owed on a year-to-year basis. But new accounting rules require local governments to divulge the level of their long-term benefit liability. And in some cases, the local government OPEB liabilities are stunning – in some cases, dwarfing the government’s total annual budget.
According to our review, the state’s largest total unfunded OPEB liabilities are concentrated in Southeast Wisconsin, headed up by MPS at $2.2 billion. Milwaukee County currently carries a $1.5 billion OPEB liability, with the City of Milwaukee at
$806.3 million. The next five highest liabilities all hail from the Soutl1easl: The City of Racine ($314.8 million), Racine County ($253 million), the Kenosha Sd1ool District ($241.6 million), the Waukesha School District ($195 million), and the Racine Unified School District ($168 million).
When a government carries a swollen OPEB liability, there are dire future consequences. At some point, the liability either must be paid, or benefits have to be scaled back.
(Unlike pension benefits, which cannot be reduced, future health benefits can be altered.) If a local government chooses to pay the liability, the revenue has to come from somewhere – either reduced funding for existing programs, or from tax increases. In a recent case, some school districts lost an estimated $120 million by buying riskier investments in an attempt to make more money to pay off their OPEB liabilities. And, of course, these benefits are all being given to employees who are no longer active.
The option most local governments have taken up to this point is to underfund their liability. While the new accounting rules require acknowledging the annual required contribution, the rules do not require funding the liability. However, whenever a local government contributes less than the required annual amount, the liability swells -leaving future taxpayers to pick up the tab.
Furthermore, having a large OPEB liability can affect a local government’s credit rating, making it more costly to borrow money. When a local government needs to undergo a new capital building project, carrying a large OPEB liability could possibly increase the cost of issuing bonds to fund the project.
The new accounting rules only apply to governments with budgets of over $100 million in 2007. All other local governments will phase in the requirement over the next two years, which will give a much clearer picture of how big of a hole Wisconsin local elected officials have dug their taxpayers.