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WI public pension system recovering from ‘bad investment year’

By   /   July 16, 2013  /   News  /   18 Comments

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.

The Legislative Audit Bureau on Tuesday issued its unqualified opinion on the state Department of Employee Trust Funds’ 2011 financial statements, the latest available.

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.

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…And, Doggone It, People Like Me: Glowing reviews Tuesday for Wisconsin’s public pension system, from Wisconsin’s public pension. But a pension expert says the system isn’t as good as it thinks.

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 mkittle@wisconsinreporter.com

Click here to LEARN HOW TO STEAL OUR STUFF!

M.D. Kittle is national First Amendment reporter at Watchdog.org. Contact him at mkittle@watchdog.org.

  • Dan

    “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.”

    I’m a taxpaying part of ‘everyone’ and I don’t get to share in the gains – only the losses as more tax money will eventually need to be sucked from our personal incomes – and, by extension, our own retirement funds – to make up for the shortfalls that will come. For a sole proprietor like myself, I find these stories especially irritating in that they remind me I’m paying 100% of my own retirement and a healthy percentage of these other folks’ retirement, while they throw a tizz about a 5.5% income contribution. But yeah, “everyone shares in the gains.”

    “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.”

    It’s a strong MARKET recovery. Yes, the market is up quite a bit over the last two years. Are the supporting sectors having a strong recovery? Not particularly. Those in charge of these taxpayer-funded public plans are advised to be careful with the money under their charge, as the investment market doesn’t reflect reality with the business sector as a whole, and the big gains – in my untrained opinion – are based on speculation and pent-up wishful thinking.

  • jacklohman

    I don’t know the system, but we have giant problems. First, we pay public employees too much, and we have too many of them, and then we allow politicians to “guide” our money investments. Problem is, we also allow our politicians to make investments in corporations that fund their campaigns. This corruption is a recipe for disaster, yet we accept it as legitimate.

  • Shoes

    Clarifications needed.

    1. Taxpayers pay for public employees. That’s a fact.

    2. The amount of money paid public employees is negotiated or now determined by Act 11.

    3. If it cost the taxpayer $70,000 a year for a public employee it does not matter where or how the money is spent. (Though the taxpayer may not like how it’s spent, it still cost $70,000.) That $70,000 is used for wages, insurance, retirement, etc. How you divide the money is irrelevent. No one tells an entrepeneur like myself how to divide my $70,000. I choose to put so much into wages, health insurance, retirement, etc. That is why I work for myself.

    4. If the public employee cost $70,000 a year, then how the money is spent is not my business. The cost of $70,000 is my business because that’s the tax burden to me.

    5. An important aspect, not understood by tax payers, is a public employee can be paid $70,000 in all wages and told to buy their own benefits out of pocket, or a public employee could be paid $40,000 in wages and the remaining $30,000 used for benefits. The fact is that it still cost the taxpayers $70,000.

    6. The focus has been lost here when we focus on who is paying what for whom, when the important fact that needs to be identified, is what is the total cost for a public employee?

    “Up until July 2011, most public employee contributions were picked up by their employer – also known as the taxpayer.” This is a misleading statement by the author. Again, the total cost of an employee is the question, simply shifting money form employer to employee doesn’t clarify or provide answers to our problems. Under the above premise, the shift simply lowered the $70,000 cost which is what we should be focusing on in the first place.

  • boo-hoo

    Public employees are also taxpayers. Which means…. they’re helping to pay their own salaries. This fact seems to get lost in this issue. However, they don’t give themselves big bonuses or raises or stock options like the fat-cats do in the private sector, which we ALL pay for in one way or another. Open your eyes, people. There’s a different reality out there.

  • baseballjunkie

    Exactly who is Andrew Biggs and what makes him an “expert.” The story makes no mention of his credentials. Of course, we know that AEI is a not-so-thinly disguised right-wink, pro-business think tank. No wonder it is critical of public pension plans.

  • tobyspeeks

    You’re wrong! The average state employess earns about $50,000/year including all benefits. That means take home pay on average is about 30-35,000. If you think that’s too much, you should move to a right to work state.

  • tobyspeeks

    They’re so desperate to get their hands on those billions they’ll say anything to try and convince people like jacklohman and Dan the system is broken. It’s working too because people like jacklohman and Dan are too stupid to learn anything on their own and only take evil greedy people like Andrew Biggs’ word for it.

  • jacklohman

    $50K is not bad at all, and everybody recognizes and accepts that take-home pay is less for everyone. But I do not cry for state employees. Problem is, we are all fighting for food on the table, except for the Fat Cats that fund the elections. And of course the politicians who pocket their cash.

    I’m a 75yo former business owner, and I would NEVER allow the conflict of interest to exist in my company that we allow with our politicians. I suggest that we throw them ALL out in 2014 and get a crew that we can trust.

  • jacklohman

    What is it about cash bribes do you not understand???

  • Franseenit

    “I suggest that we throw them ALL out in 2014 and get a crew that we can trust.”
    The t-party tried that and had far too much influence – look at the mess we have. The simple mindedness they profess makes absolutely no sense and will continue to hold our country hostage until they die a slow death.
    How about everybody take the time to research candidates – look at all perspectives and look at their HISTORY! No one seemed to care about Walker’s snarky background – how ignorant!

  • jacklohman

    Frankly, I was happy to see the Tea Party arrive, because it meant that the far right-wingers were as unhappy as the Lefties. But this is an issue of “MONEY!” It works and too few voters understand its effects.

    Our #1 issue should be getting private money out of our public elections, so our politicians are working for the best interests of the public rather than the Fat Cats that fund their elections.

  • Franseenit

    That will take many election cycles and we really seem to be beyond the ability to turn this around. Who can compete with the Koch, Wall Street, insurance company thieves, Murdoch money since they have hamstrung middle America through low wages – now we are supposed to have money to fight back? How do you propose to turn the tide – I am all ears.

  • Franseenit

    So, who in Washington is going to step up to the plate and rid our system of corporate money – whatever happened to one person, one vote? The final 2 weeks of the Walker recall Wisconsin was like an anthill of Koch Brothers henchmen. I know – I travel each week and saw the signs go up, the army approaching homes, the phony baloney promised to voters – voters are so weak – so gullible and do not pay attention in any ongoing fashion. 2 weeks before any election is not the time to inform yourself – it is an ongoing process for heaven’s sake. Jill Stein of the Green Party promises to not take any corporate money – how can she even begin to compete if people don’t do some thinking?

  • jacklohman

    We have a group in Wisconsin whose #1 issue is getting private money out of our public elections, so our
    politicians are working for the best interests of the public rather than
    the Fat Cats that fund their elections. If you are in Wisconsin, or would like to start a similar group in your state, you are free to contact me at jelohman@gmail.com

  • jacklohman

    Indeed the system is broken and the politicians like it broken. But we don’t, and they either fix it or are voted out of office.

  • knobo

    Just to get the facts straight: Public employees are required to contribute 5.5% to their retirement. Before Act 10, this 5.5% was a benefit; now I believe they contribute .55% or 10% of their mandatory retirement. For comparison, the private sector does not have a mandatory retirement, and a 50% match to a certain level would be considered quite good, until you get to the upper crust of management(a small minority).
    Public employees are taxpayers, their compensation needs to be looked at as a whole, and should be compared to the compensation in their locale; as opposed to in comparison to the large international corporate organizations which have a similar total number of employees.

  • Anne D

    Jack, that is not true. It depends on the administrator. In the district, they start at around $70,000.

  • Dan

    Defined-benefit plans are difficult to maintain during economic slowdowns, even when they happen on a fairly predictable cyclical basis. When those touting the strength of WI’s plan make comments about how great the market is right now, while ignoring the actual slow growth of the economy upon which that market is based, it makes me think that this person is taking a Pollyanna-ish view of the situation and thus is likely not someone who should be in a position of authority over the retirement plan.

    You know who should really be concerned? Those tax-paying workers who have the plan as their main retirement vehicle. If an independent review states that the actual health and solvency is much lower, and if that’s backed up by other economists saying that in general the public plans are in worse shape than those in charge say they are, then it should be a warning sign. At the very least, it oughta spur the desire to have an unbiased independent review to see where it stands, where it has strengths and weaknesses and vulnerabilities, and make suggestions for its future security. If I were an employee whose retirement future depended on the solvency of the fund, I’d want that unbiased review.

    Now, maybe I AM too stupid to learn on my own; that’s why I try to follow the expert advice of others. Retirement experts recommend at least 15% of income go to savings and investments. 15% – 5.5% = 9.5% coming from other folks like you, me, jacklohman, and anyone else paying taxes in this state. For a private sector employee like myself, my wife, and nearly everyone else I know, that 15% comes from their paycheck with no help from his or her neighbors. That’s if they can afford to put in that amount in the first place; I know my own IRA went without contribution for three years while I tried to keep my business going. Given that we’re funding this defined benefit plan while the rest of us are, at the same time, funding our own retirement, does it not make sense to know whether or not it’s A) being run well, and B) has the funding to cover the obligations? This is $74 billion we’re talking about, after all.

    Nah, I’m sure it’s fine. Someone in government said so.