Analysis of Milwaukee Public Schools’ Retiree Health Care Obligations

Milwaukee taxpayers are on the hook for nearly $2.4 billion in unfunded liabilities thanks to their school district’s retirement programs – and that doesn’t even include the cost of providing pensions for MPS retirees.

In 2004, the Government Accounting Standards Board imposed regulations forcing local governments, including school districts, to provide full transparency of their future health care liabilities. As a result, these units of government were forced to provide accountable reports detailing where and how health care funds were being spent and where the money was coming from to foot the bill.

An analysis of data provided by Milwaukee Public Schools paints a bleak picture for Wisconsin’s largest school district.

A report issued this week by actuaries at Gabriel Roeder Smith & Company shed light on a $2.398 billion unfunded liability when it came to Other Post-Employment Benefits (OPEB) in Milwaukee Public Schools. These funds, which cover items like health and life insurance, are applicable to thousands of retirees who won’t set foot in the classroom this year, and thousands more candidates who never have.

MPS’s actuarial liability, the unfunded debt created through providing OPEB funds, is growing at an alarming rate as well. From July 2007 to July 2009, this shortfall increased from $2,222.7 million to the current figure we have today – a gain of nearly $175 million in just two years. While retirees are making use of their benefits, the District is failing to cover the bill, instead deferring much of the cost for future payment because of budgetary concerns. While this removes the problem from the spotlight in the short term, it creates a looming cloud of debt that may cripple MPS in the future.

However, these benefits, which cost hundreds of millions of dollars annually, don’t exclusively go to teachers. The wide scope of OPEB reaches to spouses, secretaries, mechanics, lunchroom workers, custodians, and even board members – who need just eight years of service to qualify for full benefits. While 12,143 active and retired teachers (and their spouses) claimed benefits, 5,030 of the individuals served by Milwaukee’s OPEB have never taught a class in MPS.

At an average annual cost of $10,939.71, these non-educators covered by MPS’s pension benefits added over $55 million to the district’s burden between 2009 and 2010 alone.

This obligation comes from a funding disparity that allows OPEB costs to be set aside and accumulate debt, essentially creating a larger burden for future generations to deal with. Employer contributions to this fund have historically fallen way short of annual OPEB costs, covering only 29.8% of the actual price of insuring retirees over the past three years. These obligations, which hover between $175m and $200m annually, present a major burden on educational budgeting, and each year that the full cost is not met shifts a greater expense to be paid at a future date. As a result, approximately $388 million in obligations have added up in the past three years alone.

Essentially, as this liability continues to be left to fester, it creates a growing shadow over the future of Milwaukee’s education. GRS projections predict that this accrued liability will hit nearly $5 billion by 2017, and is projected to continue to grow at a steady rate.  If the current, pay-as-you-go funding system is left in place, a best-case scenario prediction accounts for  just $57 million in assets in that same year, leaving a liability that is only 1.4% funded.

As retirees increase and the number of active teachers remains relatively static, this is a problem that will only continue to grow unless drastic measures are taken. This annual actuarial liability must be reduced, while at the same time the employer contributions must increase in order to make a dent in MPS’s enormous obligation. This is a problem that stands to slowly suffocate public school funding in Milwaukee, taking funding from areas like teacher recruitment, facilities upgrades, and adopting new technology. This OPEB liability is the $2.4 billion elephant in the room, and it must finally be addressed.

By Christian D’Andrea
MacIver Institute Educational Policy Analyst