By Ryan Ekvall / Wisconsin Reporter
MADISON – The Wisconsin Retirement System paid its fund managers bonuses totaling $13.1 million over four years while refusing to pay state retirees $3.1 billion in cost of living increases, a Wisconsin Reporter investigation revealed.
In 2011 alone, Wisconsin Reporter discovered, 67 investment staff members at the State of Wisconsin Investment Board received $4,231,229 in bonuses — an average of more than $63,000 per person.
The bonuses were paid out of state pension assets.
Vicki Hearing, SWIB’s communications director, said the bonuses are necessary to recruit and retain quality investment staff.
“I think from our perspective, even in difficult economic times, which this is, it’s just as important to reward good investment performance, especially when our staff has performed 75 percent better than other public pension funds and have done it for less money,” she said.
“If we can’t be competitive and hire qualified staff, then we can’t manage that money in house at the lower cost. The alternative is to have managers who don’t have jobs here in Wisconsin managing the money.”
SWIB’s 20-year annualized return for the Core Trust Fund at the end of 2011 was 8.1 percent. That was actually about the same as average returns to all investors in the S&P 500.
The WRS’s recent study of its own performance concluded no changes should be made to the system, due to its “financial health and unique risk-sharing features” among retirees.
Among those unique features is a system that gives pension managers the flexibility to cancel cost-of-living increases paid to retirees in the form of bonuses.
Public pensioners in Wisconsin retire with a pension based on the average of their highest three years of salary. The bonuses — usually between 2 percent and 4 percent range — are added to that base when the fund’s investments perform well. But when investments fall short of expectations or are recovering from poor past performance, pension managers can cancel the bonuses. It’s an alternative to automatic cost of living adjustments (COLA) found in other state pension systems.
“The unique ‘risk sharing’ structure allows participants to benefit from good times but also to lose in bad times,” state Sen. Kathleen Vinehout, D-Alma wrote in an editorial. “The (WRS Study) mentions that retirees’ pensions were reduced collectively by over $3 billion in the past few years.”
Vinehout did not return phone calls from Wisconsin Reporter seeking comment.
The risk-sharing mechanism works well for taxpayers who aren’t immediately asked to make up the difference between a guaranteed cost of living adjustment and a poor-performing investment fund. And it works reasonably well for new retirees who, on the one hand, like all state pensioners, won’t receive a bonus but who continue to receive their full core benefit based on current dollar values and more recent salaries.
But older retirees, whose benefits are based on far lower salaries, are left holding the proverbial bag. Everybody gets a benefit; some benefits are just much smaller than others.
“It’s sort of like if you’ve got 100 people on the ship and the damned thing’s going to sink if you don’t get rid of 50 of them. The other 50 are saying, ‘Sorry, guys, you have to jump off the ship,’” said Spencer Artman, a Deerfield pensioner, of his feelings for a retirement system lauded by public officials, union heads and editorial pages throughout the state.
Artman, who retired in 1999 from his 27-year microbiology teaching career at Madison Area Technical College, is one retiree who’s seen his pension checks eroded by the risk-sharing feature.
“Currently 48 percent of annuitants are now at their core base annuity,” Department of Employee Trust Funds Deputy Secretary Rob Marchant told Wisconsin Reporter. “If we hit our 7.2 percent assumed rate, next year 28,000 more will be reduced to their core annuity.
When Donald Savoy of Lodi retired from teaching in 1994, the average teacher salary was around $36,000. Today, the same position pays an average of $55,000, and the formula for calculating pensions is more generous. Savoy’s base pension is about a third of what new retirees receive.
“What I don’t see is they don’t take from everyone equally,” Savoy said. “They have to go back and take from us. We have a mortgage. I have medical bills. I’m 73 now, it’s destroying us financially. Last year I lost over $200 a month.”
While Savoy receives a base pension paid in 1994 dollars, he pays 2012 prices for goods and services.
Savoy said he’s written letters to the Department of Employee Trust Funds, state legislators, congressmen and even law firms to seek a potential class-action lawsuit.
“They all say, ‘Suck it up,’ you know? ‘Be prudent.’ Making a living is something else. My wife had to go work part time at nights. It hurts,” he said.
Retirees in the private sector may empathize with Savoy’s situation. According to Boston College’s Center for Retirement Research, the average household’s 401(k) is just now returning to 2007 levels.
James Palmer, chairman of the Wisconsin Coalition of Annuitants, an informational and watchdog organization, said these kinds of complaints against the system are rare, though merit attention.
“I think absolutely it’s a concern,” he said. “All annuitants want the benefits they have to amount to a reasonable standard of living. We want to make sure an annuity cut is not impacting (older retirees) the most.”
Artman said that’s precisely what’s happened.
“That’s one of the fallacies of Employee Trust Fund,” he said. “They discriminate against the oldest employees by taking from them first. The older people get screwed and they don’t really give a damn.”
“In 2008, after they lost all that money, (fund managers) still got a bonus of $1.7 million,” said Artman, wondering why SWIB investment staff doesn’t share in the risks.
He probably won’t take solace in the fact that someday they will share the risks and rewards. The same SWIB investment managers earning six-figure salaries — and sometimes six-figure bonuses — will receive WRS pensions upon retirement.