By M.D. Kittle | Wisconsin Reporter
MADISON — The state’s auditor gives Wisconsin’s pension system two thumbs up, as the Wisconsin Retirement System lauds the pension plan as “one of the best-funded public employee retirement systems in the country.”
But a pension expert says the system, while comparatively solid, isn’t as strong as its supporters like think.
ETF released its 2011 Comprehensive Annual Financial Report on Tuesday. The agency was delayed in issuing the CAFR and expects to issue the 2012 report this fall, according to a department official.
“We are pleased to note that we did not identify any control or compliance concerns required to be reported under these standards,” the audit bureau notes in its report to the Legislature’s Audit Committee.
The Wisconsin Retirement System, the largest program administered by ETF, reported net assets of $73.9 billion as of Dec. 31, 2011, according to the CAFR. That’s down by $2 billion from 2010.
Contributions climbed 5 percent in 2011, up $80.5 million, to $1.547 billion, driven in part by the implementation of Act 10, Wisconsin’s public sector collective bargaining reform.
Up until July 2011, most public employee contributions were picked up by their employer – also known as the taxpayer.
“Act 10 restricted the employer from paying the employee required contribution, unless provided by an existing collective bargaining agreement,” the annual report states.
Public employees were required to contribute about 5.5 percent of their wages to their own retirement.
In 2011, employees paid more than $217 million of required contributions and more than $14 million of voluntary contributions, according to the CAFR.
Still, state and local governments saw their contributions to the pension fund increase 10.3 percent, from $680 million to $750 million, while total employee contributions rose 1.4 percent, from $787 million to $798 million.
Contributions, too, were boosted by a 0.2 percent decline in payroll, according to the report.
Net investment income plummeted 92 percent in 2011, down $7.6 billion in 2011 — from an $8.3 billion gain in 2010 to a $664 million gain the following year.
Bob Willett, ETF’s chief trust financial officer and controller, put it succinctly: 2011 was a pretty bad investment year for the Wisconsin Retirement System.
With an expectation of 7.2 percent return each year, the slight investment gain was a big loss.
“We rely on investment earnings to keep cash flow, and we didn’t have it,” Willett told Wisconsin Reporter.
Higher return expectations are getting public pensions into big trouble all across the country, racking up hundreds of billions of dollars in unfunded liabilities.
Willett said despite the worst recession since the Great Depression and the recession in the early 2000s, Wisconsin Retirement System returns, on average, have come in above expectations during the past 20 years.
“The WRS continues to be one of the best-funded public employee retirement systems in the country,” the latest CAFR boasts. “A well-funded system ensures that a lifetime of benefits can be paid to today’s workers without burdening the next generation of taxpayers with higher contributions.”
At the end of 2011, the WRS was 93.4 percent funded, based on the fair market value of its assets, and 99.9 percent funded based on standard actuarial measures, which smooth investment returns over a five-year period.
Andrew Biggs, resident scholar at the American Enterprise Institute and among a chorus of economists critical of public pension accounting practices, estimates the Wisconsin Retirement System’s liabilities funded at about 60 percent, based on true market values. Those funding levels are much better than debt-laden pensions systems in Illinois and California, but Biggs said that may not be high praise in the end.
“The short story is (Wisconsin is) better than most other plans out there, but they’re not in nearly as good a shape as they think they are,” Biggs said.
Biggs said U.S. public pensions systems stand alone in their accounting practices, which he said bloat the positives, making retirement plans look much better than they actually are. A reckoning could be coming as soon as next year, when new accounting practices more attuned to market value take effect.
Willett said WRS doesn’t believe it’s useful to discount its liabilities at a “risk-free rate, which is what a lot of people advocate.”
He points out that Wisconsin’s pension system can and has cut pension payments to retirees in bad economic times.
In each of the past five years, in the throes of dismal investment returns, WRS has reduced total benefits to retirees by about $4.5 billion, according to Willett.
“We don’t like doing that, but that is the design of our system,” the CFO said. “Everyone share in the gains, and everyone shares in the losses.”
The gains are coming back, Willett pledges.
In 2012, investment return soared to about 13 percent, with net assets climbing to north of $80 billion, Willett said.
“It’s definitely a strong recovery,” he said. “That’s the nature of the investment markets — they were down and now they are up again.”
But for pension observers like Biggs that volatility built into the U.S. pension system runs the very real risk of putting taxpayers on the hook for a really big bill, which rapidly is coming due.
Contact M.D. Kittle at [email protected]