December 14, 2011
One place citizens won’t find too many problems if they ‘lift up the hood’ of the state’s finances is the Wisconsin Retirement System (WRS).
The WRS pays retirement, disability and death benefits to former employees (and beneficiaries) of the state and some units of local government. The system is funded at 99.8% – one of the healthiest pension funds in the country.
While other states see ‘unfunded pension liabilities’ drain their financial balance sheet, Wisconsin can brag about a well-funded system.
Reports show Wisconsin ranking second in the nation in its pension fund solvency.
A blemish on this reputation came to light this fall. A UW-Green Bay employee was rehired, perhaps too soon, after he retired.
The story touched off a controversy. Legislators responded with a proposal to audit the WRS. Recently the Audit Committee unanimously approved an audit of the practice of rehiring retirees.
Legislators were concerned about workers who retire, are paid a pension, and then return to work while receiving their pension. But this practice can result in cost savings for the employer. If the worker keeps his or her pension the employer does not pay benefits. Some legislators feared employees were ‘gaming the system’.
“The rehiring of retirees is not illegal,” explained Bob Conlin, Deputy Secretary of the agency overseeing employee benefits. Sometimes employers have a legitimate need to rehire a retiree.
This year almost twice as many employees retired as in a normal year. When 18,000 employees leave –often on short notice- critical services cannot continue.
Remaining workers did not have the skills, experience or adequate training to move into higher level jobs. Employers conducted searches and were unable to fill critical positions. Retirees were asked to come back on a part-time, temporary basis to fill critical jobs.
Conlin said his agency investigates violations of the law and reverses the retirement if they find the employer did not make a ‘good faith termination’. State officials surveyed employers to understand how wide-spread rehiring retirees is; new rules were written to curb abuses.
While the Audit committee was focused on the rehiring practices, other facts came to light about the state retirement system.
Committee members questioned state officials about the financial health of the WRS. How much in tax dollars “support the draw” of retirees asked one member.
“None” was the answer. The pension paid to retirees is entirely funded by retirees. Active employees do not pay for retirees. The retiree fund is entirely separate.
Employees pay half of their contribution. Employers pay the other half. This money is invested during the worker’s time in service. When the person retires the money earned is moved to a completely separate fund. Benefits are adjusted based on the health of this fund. No additional tax dollars go into the fund. Actuaries monitor the fund every year to assure its financial health.
Over the years the system has been remarkably stable. From humble beginnings in 1891, strong leadership and smart investment strategy makes the WRS a recognized national leader in managing long-term pension liabilities. But some see clouds on the horizon.
Governor Walker ordered state officials to study what some view as a dismantling of the system. He directed state officials to study options to the current system. State officials responded their study would shed light on why the fund is so healthy and how the fund provides worker security at a low cost.
Other discussions among Legislators include using pension funds for high risk investments or for ‘venture capital’ for new businesses. State budget provisions exempted the fund’s managers from following rules related to the public disclosure and inspection of records related to investments – further fueling concerns about the system’s future.
Both of these actions are a mistake. Investment activity should be subject to public scrutiny. Pension dollars should be prudently invested.
The health of the state depends on wise investment decisions. Wisconsin’s pension system is a bright spot in an otherwise dreary year. Soon bond agencies will examine the end-of-the-year financial reports and decide how to rate the state’s fiscal health.
In a budget year marked by delayed debt payments and increases in long term indebtedness, we must hope bond raters look favorably on Wisconsin’s finances and take a close look at the state’s pension system.