In a little discussed or noted provision in the current state budget, the Governor ordered a study of the WRS pension system. Specifically, the study is to report on the potential for conversion of the current WRS into a defined contribution plan and to end the current defined benefit plan.
In brief, a defined contribution (DC) plan is one in which the benefit is directly determined by the amount of principle and interest contributed by the annuitant. 401-K’s are the most common forms of DC plan instruments. They are typically managed by private investment firms.
A defined benefit (DB) plan is based on a formula of salary as a multiple of years of service and other constant factors. Our DB plan is managed by a state agency, Employee Trust Funds.
In the past twenty years, there has been a massive shift in the private sector from DB plans to DC plans. At the same time there is a movement spearheaded by American Legislative Exchange Committee to remove public employees from DB plans and shift them to DC plans. Given the fact that the WRS now holds $80 billion in assets this would be a huge windfall to “money managers” who would oversee the individual accounts.
This proposal now being “studied” by the Secretaries of the Departments of Administration, Employee Trust Funds and Employment Relations is to report to the Governor and the Joint Committee on Finance by June 30, 2012. This is significant because it bypasses the Joint Survey Committee on Retirement and Pensions. By law, the legislature cannot consider a bill in regard to pensions that is not authored by the Joint Survey Committee and accompanied by an actuarial report. But, of course, the law can be changed.
The Wisconsin Retirement System is considered to be one of the best in the nation with obligations funded at over 99%. Nonetheless, it would not take many changes to begin set the wheels of a crisis in motion. There are many potential scenarios:
- One scenario already underway is the sharp increase in retirements prior to July 2011. State employees (non-University) retirements tripled from 2010 to 2011. School district and UW retirements doubled in the same period. Given budget cutbacks many of these employees were not replaced and those that were are commonly paid at half the salary of the prior position incumbent. This is a huge unanticipated outflow of pension funds that will not be replaced with a comparable receipt of new contributions for many years.
- Wages and salaries continue to be frozen or decline among public employees providing less revenue into the fund. With investment income flat or at best highly unstable, the capacity of the WRS to meet obligations continues to decline.
- As we approach summer, Walker (presuming he continues to be Governor) announces another budget shortfall. As he did in the last budget, he proposes to “borrow” hundreds of millions (last time it was $70 million) from the pension fund. It will, of course, be for a good cause such as paying for employees’ health insurance premiums (as it was the last time). Thus, in the face of swelling retiree rolls, reduced contributions due to lower salaries and fewer employees and a stagnant market for investments, the fund capacity to meet near-term obligations is sharply diminished.
The Governor and the leaders of Joint Finance, particularly Rep. Vos are ready to meet this crisis head on. And the solution will address two problems: 1) the inability of the public agency, ETF, to meet the state’s obligation to retirees and 2) the unfair inequity between public employees who enjoy a lavish and wealthy retirement (insert here a factoid about married, masters prepared high school teachers with 30 years of service and have a combined pension of $65,000/year) compared to those in the private sector (insert here numerous facts on the plight of most in the private sector, e.g. one-third live solely on their social security payment, the remainder have an average value of $50,000 in savings + pension, etc.).
The barrage of policy attacks is being ramped up. The Wall St Journal published one of many attacks on public employee pensions on 1/4/2012 and offered the alternative of defined contribution plans. A general review of the model of the attack by the author of the article can be found here. If the “money management” industry was unable to get its hands on the social security trust funds, the next biggest treasure are public employee pensions.
Some organizing in response to this attack is underway. A few meetings of retirees and current public employees have been held around the state. Though there has been little discussion of the issue on campus, there is no doubt that there will be substantial concern when this information is disseminated and the study report is released.