AFSCME Council 11 Green Sheet

The Wisconsin Retirement System and Pensions

The Wisconsin Retirement System (WRS) is nationally recognized for the service it
provides 557,000 (active and retired) members and their families, who live and
work in our communities. The WRS was established decades ago to recognize the
contributions of public employees and to provide them with some security in
retirement.

Workers covered under the WRS include teachers, judges, corrections officers,
university professors, child welfare workers, governors, blue collar workers,
administrators, public health nurses, administrative support staff, building
inspectors, librarians, police officers and countless more. Most public sector
workers and retirees in Wisconsin are members of the WRS, and represent an
estimated 12% of the Wisconsin adult population.

The authors of WRS declared that the purpose of the pension system is to “aid
public employees protecting themselves and their beneficiaries against the financial
hardships of old age, disability, death, illness and accident, thereby promoting
economy and efficiency in public service facilitating the attraction and retention of
competent employees, by enhancing employee morale, by providing for the
humane departure from service of employees no longer able to perform their duties
effectively, by establishing equitable benefit standards through public employment,
by achieving administrative expense savings and by facilitating transfer between
public employers.”

The WRS provides economic security to public employees and their families, and is
an important contributor to our state’s economy. According to the National Institute
on Retirement Security, in 2006, WRS beneficiaries spent some $4.5 billion,
accounted for over 33,000 jobs that paid $1.7 billion in wages and salaries and over
$730 million in federal, state and local taxes.

The WRS has the advantage of having an economy of scale that enables it to offer
modest pension benefits to its participants. This is one of its greatest strengths.
Indeed, the WRS has some $60 billion in assets, well-managed by professional
investment staff employed by the State of Wisconsin Investment Board (SWIB).
Roughly two-thirds of the more than $3.5 billion in WRS pensions paid each year
comes from investment returns, not taxpayer dollars. The pensions enjoyed by
public sector workers are funded largely from the smart investment returns made
by highly regarded in-house SWIB staff, who are accountable to the participants
who are represented by a board of directors.

Recently, the Pew Center on the States, a national non-profit research organization,
gave our state high marks for the WRS. According to Pew, Wisconsin is one of only
four states that has fully funded its pension system. The Pew report calls the WRS a
national leader for managing its long term pension liabilities and its unique design.
By any standard, the WRS is well-funded and well-managed. Even with the
implementation of the new employee benefit liability rules, known as the
Government Accounting Standards Board or GASB 45 rule, the WRS is considered
top in the nation.

The financing principle governing the WRS holds that the funds to pay pensions
come from three sources: employee contributions, employer contributions and
investment earnings. The contributions are made annually and are carefully
calculated by the ETF staff with the expert advice of consulting actuaries.

In most cases, employers in Wisconsin pay all or part of the employee contribution.
Having the employer pay the employee’s contribution of the cost of the WRS benefit
is a form of compensation to workers that is cheaper than paying higher wages
because WRS contributions, unlike wages, are not subject to Medicare and Social
Security taxes. Dave Stella, Secretary of the Department of Employee Trust Funds
(ETF), has noted that because of this fact it makes perfect sense for an employer to
pay the employee's share in lieu of higher wages, since it saves money for both the
employer/taxpayer, and the employee.

It is well established that, over the years, public sector workers have given up wage
increases in return for having the employer pay the employee’s share of employee
pension costs. This system has worked well for all concerned not only because it
makes good economic sense, and also because employers recognize that many
public sector workers are represented and have the right to bargain wage and
benefit packages under Wisconsin’s long-standing collective bargaining laws. Either
side seeking concessions understands that there is a quid pro quo involved.

A recent study of the WRS showed that the average state worker earning $48,000
annually may be eligible for a monthly pension of approximately $1,700 upon
retirement. This is a modest retirement income. It’s also an average, and includes
high earning, high profile public sector jobs as well as less well-compensated jobs.
Every participant in the WRS can count on some defined monthly income upon his
or her retirement.

Under Wisconsin’s pension system, workers earn what is known as “defined benefit”
pensions. That means, simply, that the monthly allotment is calculated based on a
formula of years of service, earnings, etc., and that allotment is for the remainder of
the person’s life. “DB” pensions provide workers with a modest predictable
retirement. But even here, Wisconsin's system is recognized as a leader.
"Wisconsin has developed a creative way to share some of the risk of investment
volatility with employees," the Pew report notes, highlighting the use of a dividend
process in lieu of standard cost-of-living increases, which means retiree benefits are
not immune to market shifts. This unique design resulted in a 2.1% core annuity
pension reduction for WRS retirees in 2009, and a 1.3% pension reduction in 2010,
reflecting the difficult stock market environment in recent years.

In contrast, many workers in the private sector have what is called “defined
contribution” pension systems, which means that they contribute a specific amount
to a fund that they themselves are responsible for managing. “DC” pensions are
notoriously risky, and do not provide retirement security to workers. Under “DB”
plans, workers who put in their time are guaranteed an income. Under “DC” plans,
there simply are no guarantees, and the burden of managing the investment is
borne by the individual worker.

The success private employers have had in taking benefits away from workers who
don't have unions protection certainly has fueled envy, especially in tough times.
Opportunistic politicians have been eager to pile on. Instead of standing up and
insisting that all workers deserve dignity in retirement, the opportunists encourage
a race to the bottom -- taking away benefits from those workers who still have
them. This year, Republican gubernatorial candidate Scott Walker is sounding off
about how he wants state employees to pay for their portion of their pensions and
use the savings to offset the state’s growing deficit -- a deficit he has proposed
digging deeper by reopening corporate tax loopholes.

Candidate Walker is not the only one taking aim at worker pensions. Earlier this
year, former state DOA Secretary George Lightbourn, who now heads the corporate-
funded conservative Wisconsin Public Research Institute, described the Wisconsin
Retirement System (WRS) as having “overstayed its welcome” and “far out of the
mainstream”. He said Wisconsin’s next governor should “make it a priority to
eliminate the insularity that has defined the WRS.” WPRI’s agenda is to privatize
the WRS and shift it to a defined contribution plan, transferring billions in Wisconsin
investment earnings to the Wall Street banks and investment houses that destroyed
our economy and the retirement security of the millions of American workers who
were shifted to defined contribution plans over the last 20 years.

Lightbourn’s group published the study showing that the average worker earning
$48,000 may be eligible to receive a monthly pension of $1,712. The same study
showed that, in contrast, a private sector worker who earned $70,000 would get
approximately $1,300 a month in retirement. Lightbourn noted that the economic
downturn has reduced private sector pensions and that public employee pensions
are somehow unfairly insulated from the recession. Like Walker, Lightbourn argues
that all public sector workers ought to pay more of pension costs, and that state
and local governments should use the savings to offset budget deficits.

The observations of the WPRI called attention to a crisis in the lack of retirement
security for many, if not most, American workers. Attacking the WRS misses the
point. ETF Secretary Stella noted that there is a retirement crisis in this country,
“but it’s not a crisis of having too much income…it’s so disappointing to see the
WPRI advocate for slashing benefits for the men and women who protect our
communities, teach our children, and serve the public in so many different ways
rather than offering solutions to make sure retirement security is achievable by all.
We ought to be talking about improving retirement security for everyone in
Wisconsin rather than reducing it for some.” We could not agree more. AFSCME,
along with other unions, supports enhancing retirement security for all workers.

Lightbourn and Walker disregard the fact that any effort to reduce the employer-
paid cost of the WRS would have to be negotiated at the bargaining table, where
the principle of quid pro quo holds. It is worth noting that candidate Walker has
stated publicly that he would look at any legal option he had to force unionized
workers to pay for their benefits if they refused to negotiate. Harsh words.
Lightbourn, Walker and their ilk are not alone in calling for dismantling public
employee pensions and the WRS. They are part of a deliberate, nationwide effort to
shift risk and responsibility for retirement security from employer to employee.
Some of the same forces involved in weakening public worker pensions tried,
unsuccessfully, to privatize Social Security just a few years ago. AFSCME, along
with other unions, fiercely resisted efforts to hand Social Security off to private
interests.

Those advocating for WRS privatization also seek to weaken labor unions and
bolster right-wing candidates who would dismantle these modest benefits, and our
collective bargaining rights that workers who came before us worked so hard to
establish. Undercutting the WRS would pave the way for moving toward a 401
K/DC system that would enrich investment firms at the expense of working people
and average taxpayers.

The backers of dismantling pension systems were successful some years ago in
implementing a new nationwide rule for accounting for post retirement employee
benefits. That rule, known as Government Accounting Standards Board (GASB) 45
requires pension liabilities to be stated as if they were all due tomorrow. GASB 45
has exposed pre- existing problems in other states’ pension systems, thus making
them more susceptible to changes that do not benefit workers. These same
pension liability accounting rules were largely responsible for decimating many
private sector pension systems, leaving countless workers facing an uncertain
future.

Those who say that public employee pensions are too generous and deserve to be
reduced are misguided. They fail to look at total compensation, which is what the
Center for State and Local Government Excellence did in a recent study. Conducted
by two University of Wisconsin-Milwaukee professors, the study found that wages
and salaries of public employees are lower than those for private sector employees
with comparable work experience and education.

Employees of state and local government earn an average of 11% and 12% less,
respectively, than comparable private sector employees, the study found. It is no
surprise that benefits tend to make up a slightly larger share of compensation for
public employees. Traditionally, public employees have given up higher pay in
exchange for better benefits at the bargaining table. But even after accounting for
the value of benefits, the study found that public employees earn less than private
sector counterparts. On average, total compensation is 6.8% lower for state
employees and 7.4% lower for local employees than for comparable private sector
employees.

Ultimately, cutting public employee pensions would provide minimal relief to the
growing state deficit, and it’s the wrong approach to fixing Wisconsin’s state and
local government funding problems. The sour economy caused state and local
government revenues to decline, creating a crisis that can’t be fixed and would
actually be made worse by weakening the WRS or cutting our pensions.
Even before the economic downturn, Wisconsin was facing a revenue shortage
driven largely by the tax breaks that the rich and powerful enjoy at the expense of
solid government services and working people, who are paying more than their fair
share of the cost of services. Recently, the Institute for Wisconsin’s Future, a
progressive think tank, published a report entitled “Wisconsin’s $1.2 Billion Tax
Gap”, which charges that some $1.2 billion in taxes is not collected each year
because of holes in the tax code and clever tax breaks that cost us all. If the WPRI
is looking for a solution to Wisconsin’s fiscal woes, it might consider examining the
Swiss-cheese like consistency in Wisconsin’s tax laws that let many off scot-free.

One might be tempted to dismiss these attacks on retirement security if not for
what’s at stake, especially in an election year. AFSCME takes these attacks
seriously because most of the tens of thousands of public workers we represent
participate in the WRS, and would stand to lose if the system were altered in any
way. We urge our members to become involved politically to get worker-friendly
candidates elected to office who will stand up to any effort to change the strong
WRS and the strong pension system.

This year, ask candidates for state office if they will pledge to support the strong
and nationally renowned Wisconsin Retirement System, and oppose any effort to
cut or weaken pensions that state and local sector public employees fought for
many years ago.
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