Bruce Murphy
Murphy’s Law

The Attack on Government Pensions

The most shocking budget provision was a little-understood change in the pension system which lays bare the Republicans’ goals.

By - Jul 9th, 2015 12:33 pm
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Governor Walker delivers remarks at Wisconsin Manufacturers and Commerce's Business Day in Madison. Photo from the State of Wisconsin.

Governor Walker delivers remarks at Wisconsin Manufacturers and Commerce’s Business Day in Madison. Photo from the State of Wisconsin.

Scott Walker has long wanted to overhaul the state pension system.

Back in 2011, when the new governor proposed what became Act 10, he declared the state was “broke” as as a way to justify requiring greater contributions by state and local employees to their health care and pensions. “Broke” was certainly an exaggeration, but the law required a big increase in contributions: a median-level state employee earning $50,000 annually had to pay an additional $3,060 per year for benefits received, as a Legislative Fiscal Bureau analysis found.

None of the money saved by Act 10 went to help finance the state pension system because it was already fully funded and was the nation’s strongest such system, as a study at the time by the Pew Center on the States had found. Wisconsin’s pension fund then had enough money to cover 100 percent of current liabilities, the study found. By contrast, the national average for other state pension systems was just 75 percent funding, with Illinois dead last at 45 percent funding of current liabilities.

David Draine, a senior researcher at the Pew Center on the States, called Wisconsin’s fund nationally “unique” because employees share in the risk: when the investment returns in the pension fund go up, so do pension payments. But when investments suffer losses, payments to retirees can decline. “That helps them manage risk a bit better,” Draine told the Journal Sentinel. “It’s the only state that does that.”

Another strength of Wisconsin’s system is that nearly all government entities in the state are part of it. In some states, the study found, many local governments have their own systems, which were sometimes in even worse shape than the most poorly-managed state funds.

Nevertheless, Walker and other Republicans believed the state should consider a 401(k) system like most private companies now have. To that end, the language of Act 10 commissioned a study of the state’s current pension system that would also compare its “defined benefits” plan for employees to an optional “defined contribution” plan like a 401(k) option.

The study found Wisconsin has “one of the lowest pension system costs for taxpayers in the nation” and “contains many pension policy best practices, such as a disciplined funding model and risk-sharing mechanisms that have allowed it to minimize the risks for taxpayers.”

The study also found Wisconsin’s pension benefit, where employees earn 1.6 percent of their final average salary for each year worked, “is lower than the average 1.95% multiplier reported in the Wisconsin Legislative Council’s… study of major public employee retirement systems.”

As for a 401(k) plan, an actuarial analysis found that to provide a comparable benefit to employees, an optional defined contributions plan “would require higher contributions than employers and employees currently pay.” The study also noted “numerous” past studies that a voluntary plan like a 401(k) results in many employees not signing up, reducing the size and growth of the retirement fund, “because of reduced economies of scale as well as restricting investment in certain asset classes.” Having state investment experts running the retiree fund and making decisions on how to invest the money rather than each individual employee (as in 401(k) plans, has resulted in far greater investment returns.

In reaction, Walker declared that the report “confirms that both taxpayers and pensioners are getting a great deal with the WRS,” adding “I want to be very clear: I am currently not planning to make any substantial changes to the WRS.”

But Walker has often announced he didn’t favor something only to adjust the message in the opposite direction, as I’ve documented. And changing public employees to a 401(k)-type plan has long been pushed by the influential conservative advocacy group, the American Legislative Exchange Council, or ALEC.

Which brings us to the budget provision, slipped in at the last minute to shake up the state’s retirement system. It proposed to overhaul the Joint Survey Committee on Retirement Systems, created in 1947 by Republican leaders then in control of state government, which has helped safeguard the state pension system for 68 years.

Under the law, the committee has ten members, including six legislators and four experts: the secretary of the Employment Trust Fund (the state retirement fund), a public appointee who typically has expertise in this field, an assistant attorney general who is typically well-versed in pension laws, and the state Commissioner of Insurance or an experienced actuary designated by the Commissioner.

For more than six decades this watchdog committee was part of a bipartisan state system that has helped assure Wisconsin’s pension system is the nation’s strongest. “One of the ways its been protected is by a lot of input from a lot of people with expertise in the system,” says David Bennett, executive director of the Wisconsin Retired Educators Association and its 12,000 members.

But the budget proposal would have dropped all the experts from the committee and stuffed it with ten members of the legislature structured as other standing committees are, meaning it would have a large majority of Republicans. Bennett calls it “a very dangerous” proposal that would have “upset the balance of the retirement system” and create opportunities for mischief. “Public oversight is really important to the system.”

Bennett’s group is one of a long list of associations representing retired public employees in Wisconsin, none of whom were told ahead of time about this budget provision. “We were all blindsided,” he says. “This first came up (in the budget) on the night before the Fourth of July weekend. You can draw your own conclusions about the timing of that.”

Yet Bennett’s group and others quickly reacted, pressuring legislators to drop the provision from the budget, which they did. To date, no legislator has taken credit for the proposal or explained what its goal or rationale was. “They’re all ducking for cover,” Bennett notes. “At this point it really doesn’t matter whose fingerprints were on it as much as what it would do to the system.”

But it’s quite unlikely that the provision would have been added to the budget without the okay from top Republican leaders: Assembly Speaker Robin Vos and Senate Majority Leader Scott Fitzgerald. And as with the attempt to cut back the open records law, it’s likely this was discussed with Walker, given the powerful partial veto power Wisconsin’s governor has.

Which means you can expect future attempts to trash this retirement watchdog committee or make other changes to overhaul the state pension system. And more than likely the proposal will be slipped quietly into some bill with as little prior discussion of it as possible.

Categories: Murphy's Law, Politics

43 thoughts on “Murphy’s Law: The Attack on Government Pensions”

  1. Rich says:

    Yet Bennett’s group and others quickly reacted, pressuring legislators to drop the provision from the budget.

    Did they succeed? Or was it in the recently passed budget. Truly sorry, I read and reread the article for this conclusion but couldn’t find it.

  2. Bruce Murphy says:

    Yes, legislators dropped proposal, that’s been previously reported but I’ve now made that clear in the story. Thanks.

  3. Allison says:

    The returns for state pensioners in WI are pretty lousy.

    You’d be better off just buying an index fund versus paying all the huge salaries and huge bonuses to WRS for lousy performance. Their returns dont beat the market.

  4. Bruce Murphy says:

    Alison, you could say the same about any managed fund, any mutual fund: they all fail to beat the market. The state’s fund, moreover, is a mix of stocks, bonds, cash, etc. and is more conservative than a stock fund. But its return over last 10 years is 7% per year.

  5. Allison says:

    Bruce, It depends on what time period you are looking at, but most, not all, actively managed funds fail to beat the market. Some do, but most don’t.

    I guess my question is why pay all these special people at WRS huge, huge salaries and huge, huge bonuses for below average performance, in my opinion. My opinion is that 7% is not a great return but I don’t know what they are all investing in. I do know you could have just bought an index fund and done better that 7% over the past 10 years with much lower cost.

    Maybe a topic for a future story?

  6. Vic says:

    Allison –
    Could you define “huge, huge salaries” and note the source from which you got this info? Also please define “special people.” Thanks.

  7. Allison says:

    @Vic-From a Wisconsin State Journal story.

    Last year, SWIB dished out a record $13.3 million in incentive pay.

    Williamson will get the largest bonus this year — $509,260. Combined with his $300,000 salary, he will receive $809,260. Last year, Williamson’s salary and bonus totaled $918,643.

    Chief investment officer David Villa is getting a $459,914 bonus, raising his compensation package to $874,914. Last year, Villa’s salary and bonus came to $1,075,378 — the agency’s highest pay in 2014.

    Chuck Carpenter, managing director for private markets, will get a $493,685 bonus, for a total of $765,077 with his salary counted in.

    Read more: http://host.madison.com/business/nearly-swib-money-managers-will-get-bonuses-above/article_ed938753-e51d-555c-b97a-a60e5de1fa19.html#ixzz3fQDxWkd9

  8. Jesse says:

    As a member of the Wisconsin Retired Educators Association and a WRS annuity recipient, I know that: 1) compared to peers, SWIB uses less higher cost external active management & pays less for the external management it does use; 2) the goal is to stabilize the effects of returns on the WRS – there is a slight reduction in performance during strong stock markets and protection against extreme market declines; and 3) 20-year returns are 8.6% core fund and 8.8% variable fund (10-year returns are 9.3% core and 12.7% variable). WI pensioners would not be better off with a 401K option or mandate. “Pension funds are not in competition to produce the highest investment returns. The purpose for investing assets is to defray the cost of benefits within an acceptable level of risk, based on a long-term investment horizon.” – Keith Brainard, Director of Research, National Association of State Retirement Administrators

  9. Bruce Murphy says:

    Allison, the WRS fund is HUGE, one of the largest such retiree funds in the world. If this were run in the private sector, those salaries you’re listing would be far higher. (With the possible exception of Warren Buffet.) As for mutual funds, this study found zero beat the market: http://www.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html?_r=0

    The idea of just putting all your money in an index found sounds simple, but I can’t think of anyone I know who does that because you want some diversity. Thus the mix of stocks and bonds, for which a 7% annual return of WRS is quite respectable.

    Meantime, all of this is quite a ways off the subject.

  10. fightingbobfan says:

    You can bet the right wing wants to get their claws into the WRS in order to royally reward their donors.

    The WRS is smartly run. It is the landlord for Facebook, and has made other intelligent moves.

    Compare them to the disaster at the WEDC.

  11. DairyStateMom says:

    It’s so tempting to get sidetracked on salaries and bonuses, but as Bruce rightly notes, let’s keep our eye on the ball here. The goal of ALEC (and any mainstream, or to put it clearly, what-would-have-been-screaming-hard-right-even-fifteen-years-ago, Republican) vis-a-vis any pension system, including Social Security, is to privatize it. The prospect of all those management fees is just too mouthwatering, regardless of whether it’s a good deal for the pensioners or the taxpayers. So this provision is, thankfully, out of the budget for now, but make no mistake — it’ll be back in some form or other.

  12. Reader says:

    I find the whole shenanigans with the anonymous budget inserts so sleazy. It’s evident that there are payoffs, perhaps deferred. “Fixing” things that are not broken and ignoring items that need fixing. All in the name of cult like theories on good governance that rarely if ever work in the real world.
    The meek shall inherit nothing. (FZ)

  13. toimw says:

    This article from the NY Times I think lays out perfectly what we have in Scott Walker. http://www.nytimes.com/2015/07/09/us/politics/a-political-lifer-scott-walker-has-long-been-his-own-strategist.html?_r=0

    A governor is essentially an administrator and not so much a policy maker. His/her main job is to implement the policies which she/he may have crafted but which may have been crafted by others. The Walker administrative “style” in both Milwaukee County and at the State level has been to see everything through the eyes of a political strategist and/or ideologue. Therefore, the question asked is not does it work but does it fit our strategy. This attempt to take over the WRS and stack its board with politicians fits perfectly into that. (And full disclosure, my wife is employed by a local unit of government and in a year or so will hopefully be receiving a pension from WRS.)

  14. fightingbobfan says:

    If anyone thinks the salaries paid to the WRS management are out of line, they would be nothing if this operation was ever privatized.

  15. Gee says:

    Bruce, as an addendum to this track record of Walker’s plan to poach the pension fund, let’s not forget that — despite the “don’t touch it” report from the LFB, Walker attempted again in 2013 to get his paws on public employees’ savings . . . for $200 million to bail out his disastrous WEDC.

    The pension board wisely declined, due to what it deemed to be too high-risk. (That was the polite term, for public consumption.)

    http://watchdog.org/68041/walker-to-public-pension-fund-manager-can-you-spare-200-million/

  16. Larry Baker says:

    I have always been proud of the manner in which the pension fund has been managed with the exception of paying bonuses to those persons that are paid high salaries to manage the system. Those salaries are sufficient to keep good people in those jobs. Millions are being awarded to these people when they should be happy with their present salaries. That is especially true when retirees are receiving small amounts in relation to the size of the fund! How many retirees being served by the system received bonuses when they were employed ??

  17. Rick says:

    When you say “an additional $3060” that would imply they were paying something previously. They weren’t. Act 10 made them pick up “their share” that the state previously had been picking up.

  18. Bruce Murphy says:

    Rick, according to the non-partisan Legislative Fiscal Bureau analysis, they were previously paying $1,168.

  19. Greg Carman says:

    Bruce:

    At the time the Governor pushed through Act 10, I wrote the Journal-Sentinel and argued that: as a former city employee, I have a great state pension and wonderful health insurance while I was working. Those benefits were purchased at a cost, however. During my 20 years with the City of Appleton, my pay, as a professional employee, was about 1/3 lower than my counterparts in the private sector. The deal: you will receive less pay, and in return, you will receive great benefits. I was good with that deal, but somehow the Governor got amnesia when he attacked government employees with “Cadillac” benefits. An easy sell to private citizens, who are completely ignorant about the above realities.

  20. Doug Luedck says:

    Although others, such as WREA and certain labor unions, would have you believe otherwise, POWRS was the “canary in the coal mine” on the fascists’ attempt to grease the skids for future WRS privatization. See: wisconsinara.org/issues/POWRS

  21. David Ciepluch says:

    As Greg Carman states, pension and health care benefits were negotiated as part of wages, and public workers received lower wages for decades for these benefits. Walker applied crafty language to say everyone should contribute to their pension and health care benefits. Public workers were already contributing as part of their negotiated wages. What Walker did with Act 10, was a permanent 15% wage cut that has cost Wisconsin over 50,000 in lost jobs. Public workers now have less to spend in their communities and this harms small businesses the most. Small business creates almost all new jobs. Large business has been cutting employment across WI and the USA for decades.

    Walkers attempted raid on one of the best run pension funds in the nation is not to make it better for employees that worked their entire lives for the benefit of their communities and state. Walker would have a new method and tools to reward his benefactors at the expense of all workers. Just like Walker looted from taxpayers, education, and public workers to fund WEDC in his other ALEC pay to play scam.

    The planned attack on open records is just another planned layer as part of the overall strategy to mask all this corruption and hide all the electronic and paper trails for an investigation of Walker’s corruption.

  22. Tony Muhammad says:

    What we have in Governor Scott Walker is a future “Ghost Writer.” Possible future book publication entitled,..”The Art of Smiles and Lies How Each Compliment the Other”

  23. Debbie Anders says:

    In the 1987-88 budget negotiations, the state took over paying the employees’ share of the pension contributions, in lieu of granting a larger pay-increase, presumably because it would be cheaper to contribute that money directly to the pension fund rather than having to deduct that amount from our paychecks & then deposit it into the fund. Walker lied when he said that we were not contributing our fair share to our pension fund; thus Act 10 was effectively a pay-cut.

  24. AG says:

    Defined benefit plans are always more difficult to fund than defined benefit plans, especially over time as people are living longer and fewer people are in the workforce. This is why many companies had to switch to defined contribution plans instead. Even if it’s the best run pension system in the country, it doesn’t make it immune to reality. We’ll see where the pension system is as baby boomers retire en masse… it wouldn’t take that big of a market jolt to make things interesting.

  25. Karl Hertz says:

    It is wonderful to see that the pension mischief seems to have been set aside, but I worry about issues such as doing away with the desegregation program (220) which have gotten much less attention. We may well be doing away with this integration effort in the most segregated metro area in the country just as they are finally taking down the Confederate flag in the SC capitol. Ironic indeed!

  26. Robert says:

    AG, wow… I bet those running the fund never thought of that. My God, how could they neglect to look at an actuarial table!

    And just a little farther up the comment section, we have more mensa candidates that want to cut the pay of those running the pension fund… get rid of the people that know what they’re doing & bring in people that AG’s “discovery” that people eventually retire is actually a surprise.

  27. David Buck says:

    The pattern of Walker’s approach to governing is clear: lighting bolt changes announced after previous statements indicating he was not in favor of changes in policies and programs. These almost always come unexpectedly and usually at the last minute. Occasionally he will back away from the most outrageous proposals, but still wins on most. He already carried out major attacks on unions, education, highways, and the university system while refusing hundreds of millions of federal dollars for health insurance. How are Wisconsin and its citizens better off under his leadership?

  28. AG says:

    Robert, believe it or not, there are probably many readers of this column that do not understand what I said. Pointing it out does not make the statement evil.

  29. David Ciepluch says:

    Defined pension benefits are less risky for a retiree and they can plan accordingly. Defined pension plans are also invested in similar investments as a 401K, 403B, and IRA plans although it is generally managed in possibly put in more conservative less risky investments.

    Defined pensions go away when a person dies with some options for the surviving spouse if selected upon retirement that lead to lesser payouts. A 401K generally does not guarantee a fixed pay out is subject to more severe market forces. As a person ages, the cognitive reasoning is also lessened with age, and the ability to manage a 401K themselves puts it more at risk. A managed 401K or IRA means turning over a 1% annual fee on the total amount of the fund to that manager in addition to expense ratios in the fund.

    A trustworthy state-wide managed fund is a very good option, reduces many of the management fees ($thousands annually) that could be lost to a retiree and the taxpayer. The fixed defined pension provides a stable source of income, along with Social Security and Medicare, for retirees to thrive in our communities and spend there remaining days with dignity and respect. Republicans are all about attacking these cornerstones and making people some sort of desperate souls and throwing out as many obstacles to living as possible and looting for themselves and their benefactors from all of us in the process.

  30. AG says:

    Indeed, David Ciepluch, defined benefit plans give the individual advantages that a 401k or similiar plan does not. Many people would rather have a guaranteed payment vs a variable amount. The problem isn’t for the individual… it’s the plan itself. At least a government pension plan has more guarantees than a private sector pension… but even then it’s not infallible. We’re lucky to have a pension system that performs among the best in the country… will it always be so? We’ve seen what can happen when a state’s plan is in jeopardy… it’s the tax payer to the rescue. But hey, it’s not like we’re Greece.

    You’ll notice I’m not advocating the plan to change the pension board… I’m merely saying there are weaknesses to a pension system and those plans may not always be sustainable (if they are now). Those issues should be recognized, and even if not changing to a different system, should be addressed.

  31. David Ciepluch says:

    It is a portion of employees’ wages that fund the state pension system whether it is publically or privately managed. Pensions belong to the worker but meddling politicians and management that are responsible and hold the keys for managing or mismanaging these systems are the parties that can keep it stable or put it at greater risk of loss. The managers of funds may actually be the riskiest part of a pension fund with market forces less so. There are good fund growth years where nothing is put into a large fund, and in lean years funds have to be added – this can be to government or a private businesses benefit during good years depending on how well they manage a fund. So business and government can get rewards through management of large funds. And there may be ways to improve this.

    It is of interest to all employees if they had both a pension and 401K with any matching funds or IRA to go along with Social Security. In low wage jobs it is extremely difficult to save anything and this 3-leg stool along with Medicare may not be possible.

    The last thing any worker or taxpayer needs is someone like Walker meddling and looting from pension funds. Walker has earned a 0% trust factor with his continual lying and corruption. We have seen how well he has done as CEO of WEDC and wanting to close the open records law so he can further shield his corruption from transparency.

  32. AG says:

    David Ciepluch, I’m excited to report that interacting with you is much easier when ignoring the last sentence of all your posts.

    Anyway, you’re leaving out the discussion on what happens in a down market… when the pension fund can’t fund it’s obligations. Who pays into the system at that point to make it solvent?

  33. Ricky Martin says:

    AG, ever google your own questions? That’s like asking in the comments how FDIC insurance works. I want to know what happens to those who hit retirement in a down market with their 401k… are they just poor & society has another moocher?

  34. AG says:

    Ricky, the questions are not for my benefit, I already know the answer.

    Also, I hope your retired person with the 401k has allocated their plan so it’s made up of fixed income securities, bond funds, ETFs, CDs, money market funds, etc. so they don’t, as you like to think, become poor and “mooch” off society…

  35. wisconsin Conservative Digest says:

    Why do public employees get better salaries, pensions, health, dental, days off, vacations, holiday, retirement age, sick days and other assorted goodies than those of us that have to pay the bills? My prop taxes have gone from $600 to $6000 in 40 years. 80% for public employees.

  36. PMD says:

    Can someone please fix the broken record already? Jeez it’s annoying. But then again, it’s a record, and soon enough will be gone and forgotten.

  37. David Ciepluch says:

    AG – In a well managed pension fund that is funded on a regular basis according to guidelines and actuarial experts, shortfalls can and should be avoided. This is the same for public and private pensions. When you have a case like Milwaukee County that raided their pension based on the 90s market good times, they put the entire fund at risk. And Illinois and New Jersey shorted their pension funds by not paying into it. In these cases the politicians corrupted the pension process and put workers and taxpayers at risk as well as the fund.

    I have also been fortunate to have worked for a company that regularly funded the employee pension fund to a maximum level and is well managed. During good market return years, they did not have to add into the fund that year, and in leaner years they did have to fund it.

    The nation’s federal deficit is made up of 1/4 borrowed from the Social Security Trust Fund, and 1/2 from all the various pension and 401K plans, and the remaining 1/4 from foreign investors. So 3/4 of the federal deficit is money we all owe as citizens and taxpayers, yet it is our own retirement savings. So in regards to risk, this has to be the most twisted and perverse arrangements. And the State’s pension fund is one of these investors.

  38. Steve G. says:

    Repubs see this as a “win-win,” much like how Act 10 hurt teachers unions AND got teachers to pay more into their retirement and healthcare. The move of putting the WRS under legislative control would eventually lead to privatization, again hurting teachers (seen as the “enemy” by GOP everywhere) AND putting much of their money in the pockets of Wall St management, people who give repubs a LOT of campaign cash (which used to be known as “bribes” before the Citizens United decision).

  39. Rich says:

    #36 @WCD: Wages have also gone up over that same period: http://www.ssa.gov/oact/cola/AWI.html

  40. Thomas Martinsen says:

    Murphy’s article is well researched and well written. I suspect that the likes of Walker, Voss, and Fitzgerald will continue to look for ways to raid the state pension fund because it is a solvent fund. The current governor and state legislators will need money soon, and I suspect that they will think they deserve the money state employees have saved in order to pay for what they have squandered.

    Thank you,

    Thomas

  41. David Ciepluch says:

    Walker, Fitzgerald, Vos, policies and ALEC laws have led WI to the bottom in almost every major category of economic measurement including family wages, to last in the USA. There is no visible proof that that their policies, laws, and corruption have led to anything remotely positive for Wisconsin and its citizens. The Walker style and outcome of governance is a disgrace to every common decent honest hard working person in Wisconsin and the least among us without a voice. Millions of us and our ancestors have paid thousands in of lifetimes of toil to make Wisconsin a better place. Walker and his cronies are doing everything possible to destroy that investment that has made WI a great place to live and work.

    http://crooksandliars.com/2015/03/pew-report-wisconsin-no-1-state-household

  42. Another Steve says:

    Answers to WCD: aside from its upper management and directors, private sector business has continually failed to make livable benefits for retired employees in this country. That’s why we have Social Security! Regardless of the mechanism, public employees like myself have contributed heroically to the public good and have earned the pensions they received. Other benefits in the health/dental line typically expire
    at age 65 when we get Medicare and need to buy additional coverage out of our (taxed) pension and social security income.

    As to the other notions under discussion: I am very happy with the management and overall structure of the WRS. The staff is unbelievably helpful in planning financial planning (compared to other investment advisors who are notoriously conflicted.). My overall Pension (since about a third of my employment history is Private) is a little above the poverty line ( 28k ) and would not sustain me and my wife if we had not also squeezed our budgets in every possible way in order to contribute to 403b stock mutual funds, Roth IRAs, SEP IRAs, and had some family help in paying for our children’s college education.

    The point being that (as usual) a mixed strategy of funding for retirement is best. It is critical to note that fixed benefits (WRS and SocSec) over the entire retired lifetime are one of the best defenses against outright poverty of elderly people, and the drain on public resources that entails. Conservatives really ought to live up to the label and not promote changing time tested institutions (WRS, Residency Requirements) that make our State and cities exemplary places to live, work, and raise children.

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