Milwaukee City Employes' Retirement System's recent decision to lower its assumed rate of return is a positive for the city's long-term credit outlook, Moody's Investors Service said in an issuer comment paper.
The $5.3 billion pension fund decreased its annual assumed rate of return to 7.5% earlier this year; originally it was 8% for 2018 through 2022 and 8.25% after 2022.
The city of Milwaukee's current credit rating is A1 stable. The system's assumed rate of return was 8.5% in 2016 and 8.24% in 2017, well above market interest rates for high-grade fixed income as well as other public pension funds, the Moody's paper, released Monday, said.
Thomas Aaron, Moody's vice president and senior analyst and author of the paper, said in a telephone interview that the new rate is a positive primarily because it will require higher pension contributions in the near term. "It will lower the long-term risk of unexpectedly high contribution requirements popping up for the city," he said.
While it may seem counterintuitive to see higher contributions in the near term as a positive, Mr. Aaron said, a higher rate provides lower near-term costs while making higher long-term contributions more likely.
He also noted that with the retirement system being notably mature – that is, having a retiree-heavy population causing what he calls a negative non-investment cash flow – there is an added benefit.
"With negative non-investment cash flow, the more severe that is, the more investment return volatility can constrain asset accumulation," Mr. Aaron said. The lower assumed rate of return lowers that investment return volatility.
Jerry Allen, the system's executive director, could not be immediately reached to provide comment.