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COMMENTARY: Looks like WI's Walker has caught a little irrational exuberance

By   /   June 25, 2012  /   No Comments

By M.D. Kittle | Wisconsin Reporter

MADISON — Chalk it up to irrational exuberance.

You remember irrational exuberance?

Fed chairman Alan Greenspan coined what became a catch phrase in 1996, cautioning about the real and possibly inflated value of assets.

The statement was prescient. Turns out that dot.com thing a few years later wasn't as fantastic as everybody thought. Ultimately, those can’t miss Internet-based companies missed – big time. If you held Pets.com stock in your portfolio, you know the end of that story.

Wisconsin’s chief executive seems to have caught a little bit of the irrational exuberance strain.

Gov. Scott Walker, seen by many conservatives and taxpayer advocates as the paragon of pension reform, is picking up where a renown public policy tracker and much of the media left off.

Walker touted Wisconsin’s public pension system’s gilded showing as the “strongest in the nation,” pointing to last week’s Pew Center on the States study.

Pew, noting the Wisconsin Retirement System’s full funding, asserts it should have no problem holding the $80.75 billion the system needs to fund retiree pensions.

Walker may be a reformer with plenty of conservative street cred, but he’s still a politician.

The governor who brought you Act 10 – which curtailed collective bargaining for most unionized public workers, requiring they contribute to their pensions – is trumpeting the Badger State’s healthy pension plan.

In fact, Walker was in Chicago Monday, calling a na na na na boo boo on the state of Illinois’ public pension debacle.

A news release from the Walker administration’s points to the Pew study, which notes Wisconsin’s pension system is the only one in the nation to be 100 percent funded and labeled a "solid performer."

“Illinois’ pension system is only 45 percent funded and is labeled with ‘serious concerns,’” the news release states.

“Our reforms will only make Wisconsin’s pension system stronger by protecting current and future retiree benefits and keeping the state fiscally strong,” Walker said. “Illinois’ leaders could learn from the hard, but necessary decisions made in Wisconsin. Because of our prudent decisions, state programs as well as our employers and taxpayers will not be under the imminent stress of increased taxes and/or cuts.

“Wisconsin is leading the nation forward to a more prosperous future.”

Walker is right to point out the Badger State’s much better pension plan compared to Illinois.

But that’s a little like comparing a Ford Taurus to a Ford Pinto.

Wisconsin’s system — for now — is in pretty good shape by certain measurements. It’s not about to explode on contact, like Illinois’.

“It’s at the top of a not-so-great heap,” said Andrew Biggs, public pension expert at the American Enterprise Institute for Public Policy, a Washington, D.C.-based free-market think tank.

To begin with, as Wisconsin Reporter noted last week, public pension systems use a kind of accounting — smoke and mirrors by a number of economists’ estimates — that in part stipulates that benefit promises are to be discounted at an assumed return on pension assets.

There are some pretty lofty assumptions out there. Illinois’ public teachers’ pension, for instance, uses a return rate of 8.5 percent. There haven’t been a lot of 8.5 percent returns in these pension plans, significantly funded, or underfunded by riskier stock and hedge fund investments.

In fact, public pensions are only beginning to rebound from the investment bloodletting of the Great Recession.

Even the apparent best-funded plan in the country, which has stood by a more reasonable 7.2 percent rate of return, has repeatedly missed the mark.

The Wisconsin Retirement System returned 6.8 percent on its core fund during the past decade, and just 3.3 percent during the past five years — both of which are actuarial losses. The crash in 2008 wiped out $23.6 billion from WRS’ assets.

Missing the mark effectively means you’ve got to pump more money (taxpayer money, let's not forget) into the system or achieve higher – sometimes significantly higher – investments over the long haul.

Biggs, joining a chorus of other economists, has come to the conclusion that the system of accounting used by public pension systems is a joke, and return rates, particularly in such economically distressed times, should be more in line with long-term Treasury Bonds – about 3 percent.

His research shows that if Wisconsin’s public pension system used the same kind of market-value accounting that the private sector and most pension-heavy foreign governments use, the plan would be around 60 percent funded, with unfunded liabilities running in the tens of billions of dollars.

Potential tweaks to the current standards of public pension of accounting alone, Biggs said, would lower Wisconsin’s 100 percent funded status to about 94 percent. Biggs takes the changes with a grain of salt, however, calling the Governmental Accounting Standards Board, which writes the pension accounting rules, “financially illiterate.”

Even Wisconsin’s reforms requiring public workers to contribute more than 5.8 percent to their pensions, would only go so far in bolstering a pension plan with unrealistic investment assumptions. Returns make up about 75 percent of Wisconsin pension funding.

The governor has a right to blow his trumpet and the state’s horn on Wisconsin’s pension standing.

But he shouldn’t disregard the relative nature of that strength and, more so, the fiscal peril that lies ahead for the state if it does not address its problems.

Top state leaders will find out soon what kind of changes the pension system may have in mind.

Until then, celebrating comes across to me as just more irrational exuberance.

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