MILWAUKEE COUNTY

Latest Milwaukee County pension mistakes to cost up to $3.3 million to fix

Don Behm
Milwaukee Journal Sentinel
The Milwaukee County Courthouse houses the county's Retirement Plan Services, or pension office.

The cost of correcting mistakes in Milwaukee County's problem-plagued pension system grew Wednesday by up to $3.3 million, as independent auditors disclosed additional errors in a final report to the Pension Board.

The latest damage estimate includes a total of $2.2 million in underpayments to retirees, plus interest penalties.

Auditors from Baker Tilly confirmed miscalculations in 376 monthly benefit payments resulting from pension office staff using the wrong mortality tables for life expectancy of beneficiaries, said Amy Pechacek, interim director of county Retirement Plan Services. Pechacek also serves as the county's risk management director.

The use of outdated mortality tables came to light during an earlier stage of the audit when Baker Tilly checked a random sample of pension files, Pechacek said Wednesday in correspondence to Milwaukee County Board supervisors.

A few pension analysts had used the wrong tables for calculating benefits during a four-year period from 2009 to 2012, according to Wednesday's report.

Each of the 376 individual pension benefits will be recalculated, Pechacek said.

The full cost of making back payments to those pensioners will depend in part on the interest rate penalty the  Internal Revenue Service requires the county to add to the individual payments. The final tab is estimated between $2.7 million and $3.3 million, Pechacek said.

Amy Pechacek is interim director of retirement plan services and director of risk management for Milwaukee County.

Those costs come on top of $14 million the county paid in 2016 to make up for pension underpayments to nearly 1,300 other retirees. Those errors were included in a 2007 report to the IRS.

In a separate 2014 report to the IRS, the county estimated that hundreds of other pension errors would cost the county nearly $2.2 million to correct.

Apart from pension miscalculations, the pension board's actuarial consultant erred in setting the 2015 county payment to the employees' pension fund.

The actuary was off by nearly $9 million after forgetting to include a routine cost-of-living adjustment paid to retirees in that year's overall funding requirements for the pension plan, The consultant was Larry Langer, principal consulting actuary for Buck Consultants LLC in Chicago.

The mistake was corrected in time for the 2016 payment to the fund and the county made up for the previous year's shortfall.

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Milwaukee County Executive Chris Abele said Wednesday that auditors attributed the inaccurate calculations to differing interpretations of rules within the pension office and an overly complex system. There are more than 180 paths to benefit eligibility and a few thousand variations of retiree groups within those paths.

"But it does not matter who may have been at fault — this just needs to be fixed once and for all," Abele said. "Retirees, employees and taxpayers all deserve the certainty of knowing that we are meeting our obligations fully, fairly and timely."   

Baker Tilly was hired this year to help determine the extent of payment errors among the 8,200 county pension checks issued each month.

In the first stage of the audit, Baker Tilly found mistakes in most of the 534 pension files checked within previously identified problem areas.

While correcting the majority of those errors will cost the county less than an average of $2 a month per individual, auditors found up to $400,000 in total overpayments to several others receiving disability benefits.

In reviewing a small random sample of 50 other retirees at that time, auditors found that 54% of those benefit calculations were "likely incorrect." That prompted a closer look at the use of mortality tables and led to Wednesday's disclosure of additional costly errors.

Abele requested the audit in February following disclosure of the 2014 report to the IRS.

Milwaukee County Executive Chris Abele.

In February, former retirement plan services director Marian Ninneman resigned after failing to correct an ongoing overpayment to one beneficiary that amounted to $140,000 over several years. Ninneman had been informed of the overpayments to the person three years earlier but didn't correct the mistake.

In March, the board of the county Employees' Retirement System, known as the pension board, agreed to pay up to $645,000 for the audit.

That same month, the County Board created a special work group to identify steps needed in transferring all or part of the pension plan to the Wisconsin Retirement System.

In August, Abele named a 20-member task force to review possible reforms. Switching new county hires, as well as future years of service for current employees, to the state pension system is one of the changes being studied.

The county pension system is on the brink of a funding crisis, Abele said at the time.

The county's annual contribution to its existing pension liabilities will increase from $65.8 million this year to $72.2 million in 2018. Even so, the county's unfunded pension liabilities have grown to $515 million.

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On Wednesday, Pechacek announced that she has recommended that the Pension Board award the next three-year actuarial services contract to Segal Consulting in Chicago.

Current actuary Buck Consultants, now known as Conduent, bid on the contract but was not selected among the top three firms to be interviewed, she said. Conduent's bid was the highest cost among seven companies competing for the work.