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Wisconsin’s Public Pension Problems?
Via Pension Pulse.Dan Bigman of Forbes wants to remind you Wisconsin’s Public Pension Problems Are Your Problem, Too. But are they really or is this more fear mongering? Zach Carter of the Huffington Post reports, Wisconsin's Pension Fund Among Nation's Healthiest:
While Wisconsin Gov. Scott Walker (R) has painted a dire picture of his state's pension obligations, Wisconsin's pension fund for public employees is among the nation's strongest, according to a report by the nonpartisan Pew Research Center*.
The Pew report, issued last year, concluded that Wisconsin is a "national leader in managing its long-term liabilities for both pension and retiree health care." Walker has cited the fund's lack of sustainability as grounds for his plan to revoke collective bargaining rights for state employees, but that proposal has sparked outrage among state employees and drawn tens of thousands of protesters to the state's capitol.
"We're going to ask our state and local workers ... to pay a little bit more, to sacrifice, to help to balance this budget," Walker said in a Sunday interview with Fox News' Chris Wallace, adding that he would be forced to lay off 5,000 to 6,000 state employees if his budget plan was not approved, as well as a comparable number of local public employees.
But the Wisconsin pension fund is simply not in fiscal trouble. Its managers weren't burned by subprime mortgage assets or mortgage-backed securities as the housing bubble collapsed. The fund also relies on an automated dividend system, which pays out benefits in years the system is making gains while restricting payouts in years when it takes losses. And while the pension fund had a rough year during 2008 due to stock market losses, it remains robust, both in terms of fundamental financial stability and in comparison to other state pension programs.
According to the Pew study, Wisconsin had about $77 billion in total pension liabilities in 2008. But according to that same Pew study, those liabilities were 99.67 percent "funded," giving Wisconsin one of the four-highest of such ratios in the nation. Other states had funding ratios as low as 54 percent. For comparison, expert analysts and the Government Accountability Office consider an 80 percent level to be a good benchmark for pension fund stability, while Fitch Ratings considers 70 percent adequate.
Pension accounting relies on a very long-term outlook. When the state calculates its pension liabilities, it adds up the total expected pension expenditures for the entire lifetimes of everybody currently receiving a pension and all employees expected to receive pensions. That outlook routinely eclipses 30 years, depending on the ages of state employees. A $77 billion liability is only a problem if the state has no realistic way of meeting those expenses over that 30-plus year timeframe. But the Wisconsin pension system actually does have the vast majority of that money -- in fact, in 2008, the pension fund had 99.67 percent percent of that $77 billion total on hand. If all of the assets in the fund had simply been sold at market values on June 30, the resulting cash would have been enough to pay 99.67 percent of the state's total pension payouts for decades to come.
According to the Wisconsin pension fund's own 2010 annual report, the system had $69.1 billion in total assets at June 30, 2010, while paying out $3.7 billion in benefits over the course of the previous year. The value of those assets has since risen. According to Dave Stella, secretary of the Wisconsin Department of Employee Trust Funds, the retirement system's assets were worth $79.8 billion at the end of last month. The most recent solvency test for the fund was conducted for the fund's operations at Dec. 31, 2009. At the time, the funding ratio was 99.8 percent. The next solvency test is scheduled for June of this year.
So while Wisconsin does face a $137 million budget shortfall this year, the source of that fiscal trouble is not the state's pension fund. Under the current plan, Walker hopes to generate $30 million this year by raising taxes on public employees -- the governor refers to this as increasing the "contribution" that state employees make to their pension funds.
But Walker could make the state's pension system bear the costs of a broader state budget shortfall -- one created almost entirely by lower tax revenues resulting from the economic downturn -- without raising taxes on public workers or eliminating public bargaining rights. All he has to do is cut a few ties with the financial-services industry.
According to the pension fund's 2010 report, the fund spends about 84 percent of its management costs on outside help -- highly-compensated fund managers who work for private-sector financial firms. While Wisconsin has made a concerted effort to bring more of its fund management in-house, it could do more.
In 2009, roughly half of the pension fund's total assets were managed by state employees, who were paid a total of $28.4 million for their work. By contrast, outside Wall Street professionals were paid $194.7 million to manage the other half of the fund's assets. Cutting Wall Street pay, or simply moving more fund management in-house, could easily generate the $30 million in new taxes Walker wants to assess on state employees.
Wisconsin accounts for its pension fund assets using "mark-to-market" accounting. That means that while the state often expects to hold its assets indefinitely, collecting interest payments until the assets expire, it can't simply add up those expected interest payments to determine the value of an asset. Instead, the fund can only say that the asset is worth what other investors are willing to pay for it at a given moment. If investors want to pay less than the future interest payments, that's too bad for Wisconsin.
While some accounting experts say this market-oriented accounting is a more honest and accurate way to represent asset values than other methods, U.S. corporations are often allowed much more lenient accounting standards. During the financial crisis, for instance, many banks balked at the suggestion that they be required to account for subprime mortgage bonds at the prices that people were actually willing to pay for them. Instead, they argued, banks should be allowed to account for these items based on secret company economic models. If Wisconsin and other pension funds were simply cut the same slack that the government cut for Wall Street, it's easy to imagine pension fund worries easing, even in states whose pension situations are more dire.
[*Correction: Sarah Jorgenson of The Pew Charitable Trusts sent me this correction: We saw your Wisconsin pensions article today and wanted to flag an inacurracy. Zach Carter of the Huffington Post misattributed Pew's report, "The Trillion Dollar Gap," to The Pew Research Center. The report was issued by The Pew Center on the States, a division of The Pew Charitable Trusts. The Pew Research Center is a separate, independent subsidiary.]
I agree with Mr. Carter, public pension funds should be cut some slack but in some cases like in Oklahoma where state Treasurer Ken Miller warned that state pensions are at a "crisis level", more drastic reforms need to be taken.
I also agree that Wisconsin's pension fund is in decent shape and they should move more assets in-house to save some fees. On that front, I noticed that Wisconsin's public pension fund recently made its first investment in a hedge fund, allocating $100 million to Capula Investment Management. This might be because they don't have internal expertise to implement such a strategy but they can cut fees elsewhere.
You'll also recall that Wisconsin leveraged up its bond portfolio, a strategy that others were tinkering with. If done properly, it can be a source of leveraged beta by ramping up fixed income to get equity-like returns, but it can also present additional risks that will come back to haunt them. Pensions should carefully think through the ramifications of implementing such a strategy.
Finally, state workers across the US are understandably worried about what's going on in Wisconsin (watch video below). As labour unrest spreads, expect some major showdowns ahead. This has the potential to get very ugly, very quickly.
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What's shocking is they realized Walker lied and they're publically calling him out.
I'm sure Walker is surprised his Divide and Conquer stategy didn't work.
He believed they were stupid and/or easily bought off. Wrong on all counts.
"They" : the Executive Board of the Union
so next step is creating his own privatized security force??
No-bid contracts with Xe coming to a municipality near you!
Walker did that with Wakenhut in Milwaukee County. He ginned-up a budget crisis to outsources security services.
His board initially said NO. He declared a so-called "budget emergency" and unilaterally contracted security for county courhouse/jail to Wackenhut--who then put a convicted felon in charge of operations.
An arbitrator declared there was no emergency, suspended the contract with Wakenhut.
Walker had to give backpay and benefits to laid off county employees. Cost the county a bundle.
Google Walker and Wackenhut. The video is hysterical.
When looking at a state's issues, you also have to look at the city, county and other municipal problems....think of the state level problems as the tip of the iceburg
Where I live, the freaking city has a 1billion pension shortfall and the paper is filled with articles of how city employees have gamed the system to get multiples of their average annual earnings as their yearly pension payment....like a nurse getting over 200k per year
The means for those abuses absolutely must be rooted out. The primary mechanism is pension formulas that base benefits upon something like the last three years of service. This is not necessarily a problem . . . except that union overtime rules give the most senior employees first dibs on extra hours. I've seen prison guards in Michigan work double time for their last three years . . . sleeping while colllecting time and a half wages . . . to jack up the pension payout.
It would clearly be in the unions' own best interests to eliminate this problem. It's ruining their image.
So the governor is a scumbag but that somehow equates to Govt workers should not have to pay into their own pension plans?
They DO pay into their own pensions plans.
HAHAHAHA that is a fucking joke midtowng. Get real. What are they paying in .05% and getting a 30,000% match?
Try again. It's around 50-50. Check it out for yourself.
The 50/50 is built into the law. Through bargaining many munis and SDs pay both sides.
Look it up
Do they get compensated if the pension is mis-managed and losses money? If not, then they should not have to pay into anything, no one should. Hence the ponzinomics.
Can someone find out how much money these poor saps paid (and continue to pay) wall street to "manage" these pensions. Why is no one on either side talking about this aspect of the problem. Wall street stole the money and now the governor wants to go after those that paid into the pensions but not those RESPONSIBLE for managing the accounts. I thinks this speaks to the REAL problem worldwide.
That's a good question. Unfortunately though, as with all investing, there are no guarantees with investing so there is chance that the fund might lose money, regardless who manages...of course, they could just go buy a bunch of 30-yr bonds but that would probably be disastrous since the 30-yr bond bull has been rolling over for some time now, not to mention the pension fund probably has its long term projections of 8% annual growth.
I do have a solution though...public employees can go out and get 401(k)'s and be responsible for their own retirement. Then you wouldn't have to worry about mismanagement and the long term pension liabilities could be erased.
"I do have a solution though...public employees can go out and get 401(k)'s and be responsible for their own retirement. Then you wouldn't have to worry about mismanagement and the long term pension liabilities could be erased."
Our state already does this, but it still does not address the underlying structural problems that brought the economy down. Moreover, is Governor Walker giving up his pension and benefits first? That is real leadership, don't talk the talk if you can't walk the walk.
Are you in Wisconsin? I don't think they've switched over to 401(k)'s or else their long term pension fund liability wouldn't be an issue.
As far as the underlying structural problems with the economy, I can sum it up with one word...government. Get the government out of trying to "fix" the economy. The government simply cannot "fix" the problems of the economy. The best it could do is get out of the way.
Yes, the governor, as with any other public employee should give up their pensions and benefits. The whole pension/benefit scheme seems to have just a slight conflict of interest with taxpayers.
Not in wisconsin. Not worried about it coming here, but it does get at some structural issue that need to be addressed.
A cartoon video about the union-backed protests in Wisconsin and Scott Walker's bill.
http://investmentwatchblog.com/wisconsin-protests/
Huffpuke is badly cooked, spiced and conditioned with lefty condiments? What about Fox news? Should it be guttered, nuked, spuked, spooked? Or just tubed into the trash bin?
Leveraged beta in a bond portfolio is not alpha.
Thx, corrected this but I'm sure some pension fund managers will claim it's alpha.
A leveraged bond portfolio in the face of what most perceive to be rising interest rates only makes sense in the context of extending the hedge of a LDI strategy. If they are doing it to deliver leveraged beta, that would be insanity.
Leo, you need to put a little more thought into your analysis.
Leo, you should do a piece on how Wall Street is robbing the pension funds and how pension fund management and WS are in cahoots, just look at the list of players involved in managing the wisconsin pension fund
The Wisconsin pension fund is in good fiscal shape precisely BECAUSE they've paid for (and gotten) good investment management. Fees are completely meaningless in a vacuum. It's post-fee performance that matters, and on all counts the state is being well served. Critics cannot simultaneously tout the strength of the fund and rip the money managers.
Interest and Investment income:
Three year return: -$10.7 bln"
Post fee performance. Well done, externanal management!
bullshit, prove it
Hold on there csmith. Sure, performance net of fees is what counts, but there is a caveat to that. If you have good governance and can attract and retain competent public pension fund managers, like we do here in Canada where they're compensated properly, then you don't need to dole out hundreds of millions in external manager fees because you can replicate many alpha strategies internally. It's stupid to go external if you can do a decent job internally. The problem is that people get angry when they see public pension fund managers get highly compensated. I too get angry if their bonuses are based on bullshit benchmarks that don't reflect the risks they're taking. But I also know that abuses aren't rampant and it's in stakeholders' interests to have competent pension managers who know what they're doing. A lot of these fees to external managers are hidden so nobody has a clue how much is being paid out. It's scandalous and ridiculous in many cases. Pay alpha managers that truly deserve it, bring the rest internally.
Absolutely.
No matter the political persuasion, increased contribution is the euphemistic way of saying taxes will be raised.
The unions already agreed to all the cuts, increased contributions et al. What they do not agree to is taking away the right to NEGOTIATE. That in itself is a very American tradition.
Actuallly, I find it to be very unamerican. Here is the comprimise they should go with then. We will grant you the right to negotiate if you will give the right any employee that wishes to opt out of union membership and representation.
So force these people to pay more in, fine. Do they get compensated if the pensions are mis-managed and they have lost value when it comes time to retire?
Yes, if the State is solvent. They are defined benefit pensions.
If the funds are depleted the State picks-up the balance.
But the whole point is that the state is NOT solvent. Ponzinomics at it's finest.
Yes ! I am always amused that the conflict comes down to an argument over the last bit of soup in the bowl. The bowl has already been licked clean.
I'm probably gonna get compensated for the craptastic MFS funds that were the only choices in my 401k for many years - all of a couple hundred bucks after the lawyers get done with it. Maybe I will retire a day earlier.
Zach Carter of the Huffington Post reports,
Leo, with respect HuffPuke has zero credibility
The WI voters voted for this and a balance budget. Leo and his lefty pals like "geo washington" can whine and moan but the Dems in WI who ran away are cowards.
Zach Carter likes to take already published information from other blogs and pretend he came up with the analysis.
Fucking douche that guy.
More importantly though, he missed the point that the three year total return for the main state fund was -$10.7 billion dollars. That's what the $194 million in external management fees paid for. A giant fucking bazooka in the state budget that was filled with a flood of bonds that is quickly become unsustainable (to the tune of $652 million dollars last year; ex. debt servicing, the state had a $722 million dollar surplus).
http://manifestdeconstruction.blogspot.com/2011_02_01_archive.html
Go ahead and steal this, Zach Carter. Be my fucking guest. No, no need to attribute.
Leo,
This is a ginned-up budget crisis to hide the fact that the so-called budget repair bill contains a provision to sell-off state wealth producing energy assets with no-bid and no-review.
Scott Walker wants to "legally" transfer state wealth to his corporate Tea Party funding masters the Koch Brothers among others.
He's pitting taxpayers against public employees. Divide and Conquer. Many are falling for it.
That's the REAL point behind this.
Eliminate the oppositon, consolidate power and then trasfer wealth to corporations.
When you can then complete regulatory caputure, Kleptocracy rules.
All you have to do is look at his history in Milwaukee County were he illegally transfered security for the courthouse/jail to Wakenhut--those vodka butt swilling, coconut bra wearing morons (see video below). The Milwaukee County Board voted not to transfer the contract to Wakenhut, so Walker declared a "budget emergency" and transferred the contract unilaterally.
The guy Wakenhut hired to head security for Milwaukee County building was himself a convicted felon. When an arbitrator determined his so-called state of emergency for transfering the contract didn't exist and his actions were illegal, Walker and the county had to payback the public employees--backpay and benefits.
http://crooksandliars.com/karoli/walker-and-wackenhut-odd-associations
It's interesting that you are being junked, Flattrader, for telling the truth.
That's how I know I've hit a nerve.
The truth does that.
everone's version of the truth is shape to fit their idealogies... yours and mine included. For example what I see as the truth is Public leeches have been leeching off of the the taxes paid by you and me and they want to continue.
Unions want to force membership upon the masses..it's just another form of mandatory tax.
Let me ask you a question. If I'm a public employee in wisconsin and I wish not to join the union and not pay dues do I have that option?
Oh let me answer it for you... NO! I have no choice mandatory dues are withdrawn from my paycheck.
So where is the concern about my rights to not join the union???
Your right NOT to join a union? Seriously? 12% of the workforce is union and states are trying to outlaw public employees from organizing, and you are worried about being forced into a union?
Tell me something: do you also worry about sharia law and the war on Christmas too?
Obviously midtowng you have never worked for a closed shop.Yes I know closed shops were alledgely outlawed in 1947, however there are 28 forced unionism states and only 22 that are right to work so your sharia law comparison doesn't swim. Do you think it is ok to tell a person that part of the money they have earned has to go to the union? Yes Mandatory Union dues is a reality not pie in the sky sharia law. Well that is what happens in Wisconsin. So if one is wise enough and smart enough to comprehend this fact you will know why the union is upset and it starts with $$$$$$$. not about freedom of choice or people's rights.
Do you ever worry about taxes or making a payroll ?
Oh the Koch brothers do, I am sure. they want to steal that energy production from Wisconsin so they can overcharge the public and then put that money in their pockets. Their own corporate payday!
And then use that money to buy more politicians.
Hey, cut them some slack... it's their "moment."
Governor Walker's political career, r.i.p.... lol!
Unions want to force membership upon the masses..it's just another form of mandatory tax.
For the election of socialist bstds.
Democrats, LOVE Unions.
Look at the list of over 222 exempted from Owawa Care.
How many Unions are on it?.