The Pew Center on the States is out with a new study on the fiscal soundness of state retirement systems and states' efforts to cover the long-term costs of their employees’ pensions and retiree health care.
The study finds state pension plans represent more than half of the retiree benefit funding shortfall. Experts say that a healthy pension system should be at least 80 percent funded. According to the study, in 2010, only Wisconsin had fully funded its pension plan, while 34 states were below the 80 percent threshold. Connecticut, Illinois, Kentucky, and Rhode Island were the worst among the states, with pension obligations funded at less than 55 percent in 2010. Only three other states beside Wisconsin—North Carolina, South Dakota and Washington—funded their pensions at 95 percent or better in 2010.
The news was far less cheerful on retiree health care front. According to the study, states have only 5 percent of the funds needed to pay for their retirees’ health care and other non-pension benefits—such as life insurance.
The study found 17 states did not set aside any money to fund their retiree health care liabilities. Only seven states had funded at least 25 percent of health care liabilities—Alaska, Arizona, North Dakota, Ohio, Oregon, Virginia, and Wisconsin. Alaska and Arizona are the best among states, with nearly 50 percent of their health care liabilities funded.
Report on Restructuring Wisconsin retirement System Expected Any Day Now
Wisconsin public school employees receive their pensions through the Wisconsin Retirement System (WRS). About 25 percent of the WRS pension annuities are funded by employer and employee contributions. The rest, historically, has come from investment income earned on those contributions.
Whether that pattern is sustainable is increasingly under question. Over the 2005-2011 period, the S&P 500 stock market index has averaged just a 2.3 percent return, well below the 7.2 percent return the WRS needs to fund promised public employee pensions. With the stock market lagging badly in recent years, taxpayers have been kicking in more to keep the WRS on track to meet its commitment to participants.
While rated among the most fiscally sound state pension systems in the nation (see Inside Scoop, below), the 2008 global financial meltdown is testing the WRS, which guarantees a minimum benefit based on years worked and salary, with the possibility of increases—called dividends—when fund investment income is good.
Investment losses have triggered a series of unprecedented annual dividend reductions that have left the WRS and lawmakers mulling options. Roughly half of retirees are back at their minimum benefit level after 2012 cuts. If the retirement fund assets continue to underperform, further reductions will be taken from those retirees not yet down to their minimum benefit level.
Wisconsin's 2011-13 biennial budget set a June 30 deadline for state officials to complete a study of the WRS’ structure and benefits, including the possibilities of allowing covered employees to opt for lower benefits by halting their (employee share) contributions or permitting them to switch to a defined contribution plan (i.e., a 401(k)-type retirement account) .
Several representatives of the state Department of Administration and its Office of State Employment Relations appointed by Gov. Walker have been meeting with policy officials from the state Department of Employee Trust Funds, which operates the pension system.
Representatives of the departments have so far declined to describe the talks, identify participants or disclose possible recommendations.
Existing retirees will not lose their benefits below the minimum guaranteed level. State courts have long held that pension funds are contractually the property of workers and retirees, and they can't be taken without compensation. However, benefits could be changed for new hires, and other changes could affect the system's long-term stability, a concern for retirees and long-term covered employees.
Changes could affect many Wisconsinites. Overall, 578,000 people participate in the retirement system, including the more than 170,000 retirees, 261,000 current public workers, and others no longer working for government but not yet drawing pensions. And while investment income typically covers about 75 percent of pension system costs, Wisconsin taxpayers still contribute about $1.5 billion annually, even after the Act 10 changes.
Because Madison is home to so many state and local government employees, the Madison news media is keenly focused on the impact of potential changes, as the articles below demonstrate. Most of the attention is focused on the concerns of retirees and active WRS participants, while the concerns of government employers and taxpayers are given less attention. (Note: Free registration may be required to view the articles linked below.)
Wisconsin State Journal article (Part 1 of 2)
Wisconsin State Journal(Part 2 of 2)
The Capital Times article