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.
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.
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.