FISCAL CONSERVATIVE WALKER PLANS TO "BORROW-TO-INVEST" IN RISKY PENSION FUNDING SCHEME

Risky Investment Plan to be Considered Thursday
Have we Forgotten the Plight of the School Districts
and the Similar Investment Plan they were Sold?

Special to the Readers of Milwaukeeworld

By Michael Horne

And The Milwaukee World Hound Dog Team

Milwaukee County Executive Scott Walker wants to borrow $400 million at 6.5% and invest the proceeds at 8% in order to generate funds to fill a shortfall in county revenue. The arbitrage scheme could net $800 million -- or more! -- in potential profits over 30 years, we are told, plus $3.9 million in fees to consultants -- payable immediately, if you please. Never mind which investments are paying 8% these days (Walker says it's a great time to buy stocks) or why 6.5% is considered a good rate for a loan, when the Federal Discount rate is .05% -- or who will get the fees.
The Committee on Finance and Audit will hold a Special meeting tomorrow, Thursday, March 19th, 2009 at noon in the Milwaukee County Courthouse - Room 201-B to deliberate this nonsense, contained in file 08-322(a)(*). [As usual, county documents are not generally available electronically, and must be accessed at the courthouse on clay tablets in their original Cuneiform.]
The special committee hearing will take place, untelevised, when the County Board takes a lunch break from its regularly scheduled 9 a.m. meeting. The matter could come for a final vote when the board reconvenes. The County Board meeting is televised live on the City Channel, and on the internet, beginning at 9:30 a.m.

Voters Rejected Plan in 2005

A Milwaukee Journal Sentinel article on Sunday, March 15th, 2009, noted the risky strategy failed to win voter approval in an April, 2005 advisory referendum. Similar funding methods had been utilized by other governmental units, including the State of Wisconsin, the paper said.
"Bond underwriters have already begun marketing the pension bonds in anticipation of final approval Thursday," the Journal Sentinel writes, (without mentioning names) adding Walker's admonition that "investors would likely punish the county the next time it tried to borrow money," if the plan does not pass County Board approval, which could also come tomorrow.

Five School Districts Entangled in 2006 Plan

The article failed to mention a similar borrow-invest scheme that has now embroiled five Wisconsin school districts in a lawsuit with Stifel, Nicolaus & Co.
School officials from five districts were told by consultants in 2006 their bond ratings would suffer if they did not create a funding mechanism to finance their Other Post Employment Benefits [OPEB]. They made the debt-investment decision only after being assured their funds would go in AAA rated, investment-grade paper, as required by law.
Instead, the investments were toxic, and the districts face a potentially huge loss. [See www.schoollawsuitfacts.com for details.]

Walker Plan Also Dates to 2006

In the Adopted 2007 Budget for Milwaukee County, Unit 1950, we find the first authorization of the financing plan now being considered.
It called for a "change in State Statutes" to grant "authority to issue 30-year debt ... and to use "alternative debt instruments other than general obligation bonds to develop a proposal that reduces the County's risk and maximizes its financial flexibility." [Emphasis added -- Ed.]
The measure also called for the formation of a "Pension Obligation Bond Work Group," along with $100,000 to "pay for consultant costs not covered elsewhere in the budget." (I'm still trying to find a list of the members.) The Corporation Counsel was put in charge of the group.
[The County advertised for a Senior Managing Underwriter and a Co-Managing Underwriter for the bonds in April 2008.]

The plan dates to a 2006 report by Buck Consultants and independently reviewed by Cambridge Advisors. That was the same year the school districts were swayed by the mistruths of Stifel, Nicolaus advisors overplaying the rewards (Triple-A rated!) and downplaying the risks ("Would take ten Enrons!") of their arbitrage scheme.

Supervisor John F. Weishan, Jr. says he will vote against the proposal, which he called one of "Walker's persistent efforts to bankrupt Milwaukee County." Weishan is a "lifelong resident of West Allis and graduate of West Milwaukee High School," his county biography notes. His district includes the school district of West Allis - West Milwaukee, one of the five districts that bought the toxic Stifel Nicolaus investments in a failed attempt to mitigate their OPEB benefits in 2006.
The other Milwaukee County community to invest in the toxic Stifel Nicolaus - Royal Bank of Canada product was the School District of Whitefish Bay, represented on the board by Walker crony Supervisor Joseph Rice. It will be interesting to see how he votes on this flawed measure, knowing as he does that his constituents have already been burned by a similar investment product.
Supervisor Lynne de Bruin says she's against the plan, telling the Journal Sentinel, "I'm still not able to get from any of those people from the Walker administration and the consultants: 'what is the percentage risk that this might fail?'"
Milwaukeeworld has asked the same questions, and received the same non-responses.

The Milwaukeeworld Plan

Milwaukeeworld will help Scott Walker with the paperwork for a 30-year fixed-rate mortgage on Mitchell International Airport at the going rate of 4.2%. That's better than two percent cheaper than the 6.5% loan he is pursuing.

-- Michael Horne