 School District of Waukesha Unfunded Liability Report
Last August, the School District of Waukesha borrowed for the second time to pay for unfunded liability. The first time was in 1998 (remember the renigging on the promised return of the savings to taxpayers). The August borrow was over $15 Million. The principal will be repaid after the two year refinancing the board may chose to do in 2011 or they may chose to refince the amount.. The principal has been invested in a trust fund which is projecting $3.1 Million in earnings over a seven year period from AA & AAA bonds. Current projections estimate the district owes approximately $5 Million per year in retirement benefits and budgets under $3 Million per year. The term of the loan is five years. By 2011, the amount owed in retirement benefits is projected to be close to $10 Million per year. If district employees retire at the rate the report predicts and allowed by contract, without a change in current benefits, property taxes will soar or the program cuts to the district will be detrimental. While it is commendable that the board is trying produce extra cash through investments, how responsible is it to 1.) push the debt off to the future (if there isn't a need to touch the principal which the WTL believes unlikely) or 2.) continue the current benefits structure as it is today or 3.) Invest borrowed money without a guaranteed rate of return? Is it any wonder why the School District of Waukesha is trying to push for an elimination of revenue caps--the only protection that taxpayers have? (The other push is a revisiting of the funding formula. This will only push Waukesha's tax burden even higher as Waukesha has a high property value per student.)
Milliman, Consultants and Actuaries, estimate that the School District of Waukesha, as of July 1, 2005, owes over $195 Million in post-employment benefit costs, including health benefits, life insurance, terminal bonuses (a check given upon retirement), unused sick leave and unused vacation days.
The District has not prefunded these benefits and will need to use a variety of strategies to fund this. Due to the escalating cost of benefits, especially health insurance, it is likely that a sizeable portion of this and future increases will be born by taxpayers.
The study recommends that the district do the following to lower future liabilities:
1. Base the under age 65 retiree monthly permiums on the expected medical (and administration) costs of only these plan participants. The District currently bases the under 65 retiree preimum on the blended costs of active employees and retirees, which means active employees subsidize retirees. The present value of this subsidy must be recognized in actuarial studies.
2. Increase retiree cost-sharing (i.e. deductible, coinsurance, copays) and/or retiree contribution levels to reduce the District's expected portion of retiree medical costs.
3. Change the District's future retiree medical plan contributions by reducing the District's share of future medical inflation:
a. Cap future District premiums: the District would pay the current premium plus annual increases until a specified premium cap is reached, and any increases beyond the cap would be paid 100% by the retiree.
b. Use an account balance approach: establish an account that is credited with contriubtions and interest, from which a retiree may pay retiree medical premiums; once the account is exhausted, the retiree would pay 100% of the premium.
4. Change retiree medical plan eligibility requirements:
a. Eliminate ore reduce coverage for some or all participants: for example, employees who have not completed 15 years of service as of January 1 of a specified future year may not be eligible for retiree medical coverage or may only be eligible for coverage that is lower than current levels.
b. Increase attained age and years of service requirements for coverage.
5. Pre-funding: set aside and invest contribuitons in a segregated account exclusively to pre-fund retiree medical coverage. The realized return on assets must exceed the 4% discount rate assumed in valuation to achieve cost savings.
The problem should not be a surprise. Currently, a family plan for teachers costs $21,000+ per year (2006 price). With taxpayers required to pay that premium and increases for the first three years, then the third year rate through year five, this becomes a $100,000 benefit alone. This does not include life insurance premiums or sick days. Accumulated sick days can be used to pay for additional years of insurance if the teacher has been employed for 25 years. Benefits for other bargaining groups vary. The District has been using pay as you go budgeting which funds only those retired to date. Is this unusual? Probably not, but every taxpayer should be asking why these expenses, seen as they are aquired debt, were not worked into the operating budget. The second question, just what does every other government entity owe?
UPDATE: City of Waukesha would not release their prelimnary figure but committed to releasing the actual figure within a month. UPDATE: According the the City of Waukesha, the liability is $34 Million. The report should be published soon.
UPDATE: Waukesha County has prepaid its retirement obligations!!
Allison Bussler's response:
The County Exec asked me to get back to you regarding your question about how much unfunded liability we have. This is one of those questions we love to get because we have a great answer. Waukesha County does not have any unfunded pension liability. After several years of payments, Waukesha County retired our unfunded liability in 2001. Because the county took this action, it saves us about 1.2% of our payroll every year. You may also be interested to know that we do not have any post-employment health care benefit liabilities.
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