The retired firefighters, police officers, teachers and other state and municipal employees of Wisconsin are set to suffer yet another reduction in their monthly pension checks. On May 1, for the fifth year in a row, many of the 168,000 retirees and beneficiaries in the Wisconsin Retirement System (WRS) will begin receiving payments that are as much as 13 percent smaller than in 2012.
But its not just retirees who will have more trouble making ends meet in the Badger State. The 256,000 active employees in the WRS have been taking home smaller paychecks since July 2011. That is when Governor Scott Walker and the state legislature, as part of an effort to close a $3.6 billion state budget gap, mandated that public workers split the required contributions with their employers. Before that Wisconsin municipalities picked up most or all of their employees share of pension contributions.
At first glance, these reductions look similar: Both retirees and active employees will take home or receive less money than in years past. But there is a key difference. While current employees have recently begun to share their pension contributions with their employers, the retiree reductions are a direct result of a well-constructed pension machine that increases or decreases payouts in tandem with the gains and losses in the WRSs investment portfolio, which now has $84.6 billion in assets. Designed decades ago and unique among the 50 states, the ninth-largest public pension system in the U.S. features a mechanism that insulates Wisconsin from wide swings in funding by balancing both cost-sharing and risk-sharing between employers (that is, taxpayers) and employees.
Wisconsins multilevered retirement machine also awards pensioners an annual bonus, or dividend, when asset prices are rising that has reached as high as 17 percent (during the bull market in 1999). Retirees can also rest assured that their pensions are secure for the long haul despite any short-term gain or pain, because the adjustability feature keeps the WRS close to 100 percent funded. For their part, taxpayers can take comfort in knowing they wont get hit with an increase because of a shortfall in the pension trust fund. Although the investment portfolio lost 26 percent of its assets in 2008, when the financial crisis exploded, taxpayer savings have been impressive: At the end of the 201314 pension calendar year, the state will have shaved total pension benefits by $4 billion over five years.
The Wisconsin Retirement System is fully funded, and the explanation is largely based on the design of the system, says David Villa, who joined the Madison-based State of Wisconsin Investment Board (SWIB) as its first chief investment officer in June 2006. Villa is responsible for ensuring that the WRS achieves the top returns needed to deliver its 76 percent share of the systems contributions (employers and employees split the rest).
It turns out that the Midwestern state best known for cheese and beer also has the best-designed and best-governed pension system in the U.S. The WRSs ability to balance employer and employee gains and losses has sheltered Wisconsin from the pension problems that are running rampant in other states. Neighbor Illinois has only about 45 percent of the assets needed to meet future pension liabilities in its state employees, teachers and university systems. In total, U.S. public pensions have a $757 billion underfunding hole, according to a June 2012 report by the Pew Center on the States.
The WRS was not immune to the financial crisis, losing $22.7 billion in 2008. So its a little ironic that although former Wisconsin public employees are still feeling the pain in the form of payment reductions, these very payment reductions are the reason state retirees are likely to continue to receive their benefits in the future.
The Wisconsin pension machine aligns the interests of its employees, taxpayers and investment office. Beyond the adjustable gears and switches that pass on investment gains and losses to Wisconsin retirees and tax savings to citizens is a system of governance that ensures employers and employees make every required contribution, in up and down markets. The third critical element is a bulletproof trust fund that prevents poaching by state officials in search of extra revenue. On top of it all is an investment process that is akin to the more risk-based investing used by top educational endowments and foundations.