WRS fights back against Dewey's plans to cut benefits

Since I wrote my piece on the audit of the Wisconsin Retirement System (WRS) a few days ago, there has been a few developments involving the retirement fund for most of Wisconsin's public employees. The first of which involves an interview State Sen. Dewey Stroebel gave to the Wheeler Report discussing the WRS and a couple of bills he has proposed to "stabilize" it.

....Sen. Stroebel said he will be re-introducing the bills now that he has the actuarial studies. With regards to SB-328, Stroebel said the situation is being gamed. Stroebel said when someone spends 25 years paying into the retirement at a specific level, then there is a three-year change it affects the soundness of the actuarial system. Stroebel said it isn’t fair and equitable. With regards to SB-329, Stroebel said early retirement isn’t actuarially funded and every time someone takes early retirement there is a “hit to the system.” Stroebel highlighted that the actuarial was done at a 7.2% return, but if that number were to drop that could significantly impact the retirement fund. Stroebel said the bills are aimed at making small policy changes to make sure the fund is solvent, rather than having to make big changes should there be a change in the fund. Stroebel emphasized that in 2001 total employee contribution rates were 9% and in 2016 they are 13.6%. Stroebel said that’s a significant change and it is eroding what employees are able to take home in pay. Stroebel said this is a disservice to the employees, that the state relies so heavily on the pension instead of on pay.

When asked about opposition to the bills, Stroebel said ‘change.’ Stroebel emphasized that in the past the courts have said that the state can make changes to benefits, but circumstances must be considered. Stroebel highlighted the early retirement bill would not affect anyone who is older than 40; meaning there would be 15 years before the state would see the changes. Stroebel said the 3-5 year change would be delayed five years to minimize the impact to current employees.

Well, Sen. Stroebel doesn't need to worry too much about that 7.2% return in the WRS for this year, because I noted that the Department of Employee Trust Funds (ETF) released figures on the investment performance of the WRS near the end of (last) week. And it’s been doing pretty well in 2016.

Core Trust Fund: 7.0% (Benchmark: 6.5%)
Variable Trust Fund: 8.4% (Benchmark: 8.1%)

Preliminary Value of WRS Assets under Management as of November 30, 2016

Core Trust Fund: $88.3 billion
Variable Trust Fund: $7.1 billion
Total: $95.4 billion

So the WRS was at the “tread water” figure by November 30, which would let it stay at the 98.2% funding it was at on December 31, 2015. Then given that the ridiculous “Trump Rally” has continued on Wall Street in the week-and-a-half since then, it seems very likely that the fund will be back over 100% when it is next figured for the end of calendar year 2016.

But Stroebel does have a point about how 7.2% is a high standard to reach and maybe there's some need to add "flexibility" to the fund in case things go down and stay down in the market in coming years. So when I saw The Wheeler Report linked to an actuarial study of Stroebel's bills from Gabriel, Roeder, Smith and Company, my geekiness got intrigued, and I checked it out.

Here's what the actuaries say will happen if Stroebel's bill to raise the early retirement age from 50 to 52 for police and firefighters and 55 to 60 for other public employees would become law, basically that there would be a short-term bump in expense, but a long-term savings that reduces costs to taxpayers and employees because they don't have to put as much into the WRS.

It may seem counterintuitive that a change that increases the present value of future benefits (PVFB) can lead to a decrease in contribution rates. The initial increase in PVFB is very small in relative terms and can be caused by the interaction of the formula benefit with the money purchase benefit (more members being shifted to the money purchase benefits) as well as the shift in the retirement decrement pattern. In the long term, however, extending the retirement age tends to allow members to accrue their benefit over a longer period of time which typically reduces the normal cost for new entrants. In simple terms, this is a reflection of the fact that extending the retirement age means that fewer people will draw benefits over the life of the plan, and therefore total costs can go down (more money is paid to each person, but fewer people in total are involved). The long-term impact represents the expected change to the future service normal cost as future entrants join the plan under the proposed benefit structure. The long-term impact will emerge gradually over time as current active members are replaced by new hires.

A second Stroebel bill would make the pension benefit be based out of the 5 highest-paid years for an employee, instead of the 3 highest it is today. The actuary says a benefit of this would be that it would reduce the practice of "spiking" pay to get a better pension.

Lengthening the FAE period to 5 years from 3 years will lower benefits for almost all participants, and therefore lower long-term plan costs. It will also reduce the effect of most pension spiking that may be occurring. Pension spiking refers to the situation where there is an unnatural increase in earnings toward the end of the career that has the effect of raising the retirement well above what is intended by the benefit formula. Examples would include:

John spends most of the public employment in a capacity that yields a year of service credit per calendar year but has a very low pay base. Perhaps John was an elected City Council person earning $12,000 per year for 20 years, in addition to having a private practice as an attorney. John later gets a job as in-house Counsel to the City at $80,000 per year, works three years, and then retires. In that case, John’s final average earnings would be $80,000, when almost all of the funding that WRS received was based upon the $12,000 pay rate.

Within a couple of days, Department of Employee Trust Funds Secretary Robert Conlin responded to Sen. Stroebel with a letter that clarified some details, including a Stroebel claim that the state had to borrow to keep the WRS solvent in 2003, leading to a large balloon payment due in 2018 (a payment that was deferred onto future years by a debt shuffle that the Walker Administration pulled off earlier this year). And ETF Secretary Conlin reminded Stroebel of the real-world consequences of the bills he is proposing, and possible effects on people's lives.

First, the WRS does not have a “solvency” issue, and if it did, these bills would do little to address it. The WRS is well funded and in a position to pay promised benefits.

Second, the State did not borrow money to “backfill” the WRS (in 2003 and 2008). The WRS was well funded prior to the State paying off its benefits liability and remains so today. (correct. The debt borrowing was actually a compromise by new Governor Doyle and the GOP Legislature to deal with the Thompson/McCallum deficit without raising taxes)

Lastly, while the bills may somewhat reduce contribution rates for public employees and employers, they do so by reducing benefits of current employees and in a way that may not be equitable.

The bills may also present unintended workforce challenges. As an example, we would anticipate seeing another large wave of retirements as the applicability date for SB 328 nears. Over the next five years, about 40% of the current workforce will be eligible to retire and SB 328 may lead many of them to do so sooner than they ordinarily would.

That last point is also noted in the actuarial study, which says that the costs of paying for retirees out of the WRS would actually go UP in the short-term because of a "rush to the door" from Boomer-aged employees looking to lock in their higher benefits.

As written, the proposal has a cliff effect that is likely to result in a reduction in accrued benefits for some people. Suppose, for example, that the bill passes, is signed by the governor, and is published on December 11, 2016. The bill would become effective January 1, 2021. Consider next an individual who is eligible to retire on December 1, 2020. If that person actually retires on December 1, 2020, he or she would get a retirement benefit based on a three-year FAE determination. If instead, that person delays retirement by one month, the retirement benefit would be based upon a five-year FAE determination, and could well be lower. In addition to requiring careful legal review, a provision such as this is likely to create a temporary rush to the door, at least for people whose benefits would actually go down due to the delay.

So no, there is no immediate funding crisis in the WRS to "solve", and while Sen. Stroebel's bills to raise the retirement age and reduce the pension benefit for WRS employees would help the numbers even more, you'd be screwing over a helluva lot of Wisconsin workers and their families, and likely reduce the quality of employee and services that state and local governments offer in Wisconsin.

Of course, maybe that's the plan from Sen. Stroebel and his fellow ALEC boys, isn't it?