Thursday, December 8, 2016

WRS pension still strong, and shouldn't be targeted

It was a late Friday afternoon info release that generally was ignored by media, but the Legislative Audit Bureau released its latest update on the finances of the Wisconsin Retirement System (WRS), with numbers updated as of the end of calendar year 2015.

And despite the lack of media attention, I think the report had a few items worthy of notice, not the least of which is the fact that the WRS isn’t fully-funded anymore.
As of December 31, 2015, the WRS has a fiduciary net position of $88.5 billion. When the total pension liability of $90.1 billion is subtracted from the fiduciary net position of the WRS, a net pension liability of $1.6 billion results as of December 31, 2015. As shown in Table 3, this is a decrease of $4.1 billion from the net pension asset of $2.5 billion reported as of December 31, 2014.
So why did the WRS finances slip in 2015? Two big reasons- a decline in the stock market and an additional 6,200 retirees being added to the beneficiary pool.
Contributions to the WRS from employers and employees remained relatively stable at $1.9 billion in 2014 and in 2015. Net investment income, which is the sum of realized and unrealized gains and losses less SWIB’s investment expenses, declined from $4.9 billion in 2014 to a loss of $675.0 million in 2015, or by 113.8 percent. The decrease in net investment income reflects the declines in investment returns realized by the Core and Variable Funds. As reported by SWIB, the gross investment return of the Core Fund declined from 5.7 percent in 2014 to a loss of 0.4 percent in 2015, and the fiduciary net position of the WRS as of December 31, 2015, was $88.5 billion. Net investment income declined from $4.9 billion in 2014 to a loss of $675.0 million in 2015 due to declines in the investment returns of the Core and Variable Funds.

The investment return of the Variable Fund declined from 7.3 percent in 2014 to a loss of 1.2 percent in 2015. Total WRS benefit payments provided to retired participants or their beneficiaries increased from$4.5 billion in 2014 to $4.8 billion in 2015, or by 6.3 percent. The number of retired participants increased from 185,600 as of December 31, 2014, to 191,800 as of December 31, 2015. The average annual annuity paid increased from $24,185 in 2014, to $24,780 in 2015, or by 2.5 percent.

Now it’s not like we are in any kind of pension crisis because of this- the WRS fund is still 98.2% funded and besides, that figure is always based on the recipients taking all of their money out at once (a scenario that won’t happen in the real world). In addition, the current system makes adjustments when it is less than 100%. Both the employer and employee pension contributions go up from 6.6% this year to 6.8% in 2017 to help pick up the slack, and the annuity for retirees in 2016 only went up by 0.5% for those in the Core Fund and actually went down by 5% for those in the Variable Fund.

Interestingly, the celebration of the reopening of the casino run up on Wall Street that’s happened in the 4 weeks since Trump was allegedly elected president will probably firm up the WRS, at least for next year. As of today, the S&P 500 has jumped 4.6% since Election Day, and is now up over 9.5% for the year, putting it above the 7.2% benchmark that the WRS counts on to cover its expenses in a given year. So if the GOP or other privateers try to claim that the WRS is shaky, they need to be confronted with the fact that the WRS may well be back to fully funded at the end of 2016, with payments to retirees likely to rise as well.

But what’s also interesting about the WRS being under 100% at the end of 2015 is that it takes away a potential target for Governor Walker and the GOP to raid in case the state budget implodes. When it was $2.5 billion in the black at the end of 2014, it would seem that taking some of that extra money to plug a one-time hole would be a tempting move for a group of Bubble-Worlders who want to claim “we balanced the budget without raising taxes.” Now with the pension technically underfunded, it’s not fiscally feasible (and possible illegal) to do so, since it would endanger current and future payments that have been made.

There’s also an intriguing breakdown in the LAB report of who owes the relatively small amount of pension liability in the WRS, with the largest employers being state agencies and the UW System.
As shown in Table 4, the ten largest WRS participating employers were allocated a total of $669.9 million, or 41.2 percent of the $1.6 billion net pension liability as of December 31, 2015. In comparison, these same participating employers were allocated $1.0 billion, or 41.0 percent of the $2.5 billion net pension asset as of December 31, 2014. The proportionate share of the net pension liability for State of Wisconsin agencies as of December 31, 2015, was $456.1 million, of which $220.8 million related to the University of Wisconsin (UW) System. The net pension liability for the state agencies will be included in the State’s GAAP-based financial statements, which will be published in the State’s CAFR for the year ended June 30, 2016.
This may be worth keeping track of in case the Legislature and/or Governor tries to spin off part of all of the UW System. While I support doing so for UW-Madison and UW-Extension (as I explained here), one of the questions that would have to be cleared up would be whether that pension liability would be shifted to the spun-off UW entities, or kept under state control at the WRS. As an example, the UW Hospital and Clinics became a separate entity several years ago, but still has its retirement assets in the WRS, with their share of the pension liability running around $52.8 million at the end of 2015.

So while this LAB report on the WRS may have flown under the radar, keep it in the back of your mind if GOP dipshits like Sen. Dewey Stroebel try to change the system to “make it more solvent.” There is no problem with the WRS’s financing, even with this temporary drop below 100% funding, and in fact it remains the model by which all other public pension plans should follow in terms of fiscal stability and responsibility.

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