City of Milwaukee could get Pension Obligation Bond Authority

April 13, 2009 ( - Wisconsin Governor Jim Doyle has proposed allowing the city of Milwaukee to issue pension obligation bonds to cover its pension fund payments.

A news report in the Journal Sentinel newspaper saidDoyle included the pension bond provision in his budget to give the city the same “flexibility in addressing pension funding issues” as Milwaukee county, said Linda Barth, spokeswoman for the state Department of Administration.

However, the city officials said they didn’t ask for the borrowing power and wouldn’t want to use it unless federal tax laws are changed, according to the newspaper. Tax-exempt bonds typically carry a lower interest rate than taxable bonds, Comptroller W. Martin “Wally” Morics explained. That increases the chances that investment returns would exceed interest payments.

City officials still think issuing pension bonds would be a risky move, said Morics and city budget director Mark Nicolini. But it would be less risky if such bonds were tax exempt, as they were before 1986, said Morics.  The newspaper said the city pension was overfunded until last year when the stock market downturn created an estimated $40 million shortfall   after little or no employer contributions in most recent years.

POB Design

Pension obligation bonds allow a state or local government to borrow the cash it needs to pay its pension fund contribution. The proceeds then are invested in the pension fund, in the expectation that investment returns eventually will produce enough money to pay off the bonds with interest, and perhaps produce a profit for taxpayers, as well (see  Luck of the Draw? ).

But such a plan carries the risk that investment returns will fall short and taxpayers will be required to make up the difference, said Morics.