BEST IN SHOW: State Budget Solutions says reforms by Gov. Scott Walker and consistent pension contributions have helped lead to the Wisconsin Retirement System having the highest funding ratio in the nation.
By Adam Tobias | Wisconsin Reporter
MADISON, Wis. — Take a bow, Wisconsin.
Under the leadership of Republican Gov. Scott Walker, the Badger State once again has the most well-funded public pension system in the nation, according to a study released this week by State Budget Solutions, a fiscally conservative think tank based in Virginia.
The Wisconsin Retirement System also has the lowest percentage of unfunded liability as it pertains to the 2013 gross state product and the second lowest cost per capita, only behind Tennessee, the report says.
But don’t go ordering balloons, streamers and other party favors just yet. You’re going to need the extra cash.
Wisconsin’s estimated funding ratio of 67 percent is still below the 80 percent benchmark that’s considered healthy by industry standards, and each resident in the state would have to pay $6,720 to erase the pension system’s $38.6 billion in unfunded liabilities, the study says.
The state, however, has a much different opinion.
The Wisconsin Department of Employee Trust Funds has been touting a 2013 report by the independent investment research firm Morningstar that lists the state pension system’s assets at $78.9 billion and accrued liability at $79 billion, resulting in a funding ratio of 99.9 percent.
Using those figures, each resident would have to spend $18 to cover the projected $99.3 million in unfunded liabilities.
So why the conflicting numbers?
Joe Luppino-Esposito, author of the State Budget Solutions report, told Wisconsin Reporter his organization uses a measure known as “fair market valuation” to determine the unfunded liabilities of public pension plans.
State Budget Solutions also uses a much lower discount rate — a plan’s expected risk-free return in the future — than state governments.
If the discount rate decreases, a pension plan needs more assets in the present to ensure the fund can produce enough investment returns to pay an estimated amount of benefits in the future.
For its survey, State Budget Solutions used a discount rate of 2.73 percent, the approximate equivalent to the yield of a 15-year U.S. Treasury bond. The state uses a discount rate of 7.2 percent for active participants prior to their retirement and 5 percent for retired members and for active and inactive participants following retirement, according to the Department of Employee Trust Funds.
Although Wisconsin’s discount rates are among the lowest in the country, Luppino-Esposito doesn’t think they are low enough.
“We base our numbers on a discount rate that carries much less risk,” Luppino-Esposito said. “We would rather the pension plan make safer investments and ensure stability for pensioners and state residents who will lose out on vital services if the pension liability becomes too large.”
To validate his organization’s methods, Luppino-Esposito pointed to a Moody’s Investor Services report released in September that shows the unfunded liabilities of the 25 largest state pension plans — including Wisconsin’s — tripled to nearly $2 trillion between 2004 and 2012, despite coming close to meeting their “lofty investment return goals.”
“The most recent Moody’s report shows us that even if investment targets are met, high discount rates will cause the funds to come up short by trillions of dollars,” Luppino-Esposito says in his study.
But Luppino-Esposito maintains Wisconsin is in much better shape than other states partly because of Act 10, Walker’s signature collective bargaining reforms that also required most pension contributions to be split equally between public employees and taxpayers. Prior to the passage of Act 10 in 2011, most public employees didn’t contribute anything to their pensions, mainly due to collective bargaining.
State and local government employees paid $1.59 billion toward their pensions from 2011 to 2013, according to data obtained by PolitiFact Wisconsin. Employee contributions in 2014 are expected to come in at $761 million, saving taxpayers close to $2.35 billion over four years.
Luppino-Esposito also considers the Wisconsin Retirement System to be stronger than most because, unlike New Jersey, the Badger State hasn’t skipped out on making consistent pension contributions.
“It’s either employees or the government or both that need to actually be putting money into the system now if they want to have the money later,” Luppino-Esposito said.
New Jersey is hardly alone, according to Sheila Weinberg, founder and CEO of Truth in Accounting, an economic think tank based in Chicago.
Because of balanced budget requirements, Weinberg says state leaders often look to cover budget shortfalls by slashing pension payments because those funds are not needed right away.
State Budget Solutions’ report estimates all state pension plans combined are underfunded by $4.7 trillion.
By delaying those contributions, lawmakers can gain political favor by promising certain benefits down the road without putting any money aside at the time, Weinberg said. That makes it hard to hold legislators and governors accountable because it’s impossible to know how much government really costs, she added.
“There’s no reason in 20 or 30 years that a taxpayer should be paying for a retiree’s benefits because they are not going to receive any services from that employee,” Weinberg told Wisconsin Reporter. “So, it totally messes up your accountability because they can go ahead and take these current compensation costs and push those onto future taxpayers. So that means they don’t have to raise taxes to pay for those right now. They’ll have to raise taxes in the future, but ‘I don’t care because I’m elected right now and I don’t care about the future.’”