REPORT: Scott Walker, Right-Wing “Think Tanks” creating another crisis – Public Employee Pensions

Recent reports on the fiscal state of the Wisconsin Retirement System (WRS) have been consistent. The Pew Research Center rated Wisconsin a “solid performer” in employee pension funds. The Wisconsin Retirement System (WRS) Study submitted under Act 32 on June 30 reported on the fiscal soundness of the fund as well as reforming aspects of the program, including allowing employees to opt into 401(k) style investment. This report was clear in its assessment of the WRS:

Given the current financial health and unique risk-sharing features of the WRS, neither an optional Defined Contribution plan nor an opt-out of employee contributions should be implemented in Wisconsin at this time.

Despite these two independent reports reaching the same conclusion; right-wing think tanks and corporate conservatives like Scott Walker are colluding to create a “crisis” of unfunded liability and debt. This crisis will be used (much like Walker’s $3.6 Billion deficit lie) to push reform of a successful program which needs no reform, is fully funded, and working. The November election outcome will decide if political will exists to push legislative pension reform in Wisconsin. If successful, corporate conservatives will decimate one of the most beneficial, responsible public pension programs in the world – selling it off to 401(k) investments companies like TIAA-CREF, which stand to profit greatly from “reform.”

Public Sector, Incorporated is a think-tank project of another right-wing think tank, the Manhattan Institute (MI). The Manhattan Institute receives millions of dollars in funding from 27 of the most conservative foundations in the world, including Koch Foundation, Olin Foundation, Bradley Foundation, and Scaife Foundation).  Money from these endowments funds research and writing at Public Sector, Inc., to promote reform of public sector pensions and benefits plans.

A June 26 article, “Wisconsin’s Pension Debt is a Liability, too” appearing on Public Sector, Inc. (PSI) website sounded the alarm about Wisconsin’s pension debt, and right-wing pundits have picked up on these talking points:

Back in 2003 and 2004, the state of Wisconsin and many of its municipalities faced growing pension liabilities. To deal with that, the state essentially punted the problem down the road by borrowing  $1.8 billion. It put about $700 million into its pension system and used another $782 million to finance payoffs to retiring state workers who had accumulated unused vacation time. 

Two days later, another PSI article, “The Wisconsin Retirement System is not fully funded” raised the question of the WRS plans “faulty” accounting system, citing a Heritage Foundation article from May 2012 and a Wisconsin Reporter article from June 25. Both articles point to “faulty accounting assumptions” amounting to nothing more than “smoke and mirrors, by a number of economists’ estimates, which make Wisconsin’s Pension Fund appear to be fully funded” (quotes from Andrew Biggs, American Enterprise Institute Economist).

According to Biggs, if the WRS used “market value accounting” as required in the private sector, the WRS fund would be only 60%, not 100% funded. Biggs states the Government Accounting Standards Board (GASB) which writes the pension accounting rules nationwide, are “financially illiterate.” He concludes “no state pension plan has healthy finances.” These talking points as well, have been picked up by right-wing pundits.

As recently as June 9, Scott Walker gave a speech at the Manhattan Institute, where he referenced the necessity of sound pension systems and reform to keep them sound. Walker has strong support, and is heavily influenced by the Manhattan Institute. 39 minutes into the video, Walker has a rather friendly exchange with billionaire venture capitalist and Home Depot financier Kenneth Langone. 

The attention being given these accounting practices (by right-wing think tanks) come at a time when the WRS has been declared sound by two independent studies – making any reform to the fund more difficult politically, and unwise fiscally. As we have seen with Scott Walker, political expediency and fiscal responsibility have not been his primary concern. Ideological pursuit has. The question is, are these “crises” of debt and accounting practices being created by corporate conservatives to raise fear and doubt about the WRS to promote reform? For whose benefit?

The facts about the WRS speak to these attacks as being unwarranted, and factually misleading – if not outright inaccurate. The PSI article about the WRS debt, while factually accurate, is misleading about the nature and impact of the restructured debt.

The debt referenced above was unfunded liability from Wisconsin state employees, sold in bond issue as part of the 2003 biennial budget. These liabilities accrued as new employees entered the system as guarantee of benefit (until their contributions accrue and their pension becomes funded); and as long-term rates were decreased reflecting the market. In 2003, Wisconsin (the state, not the WRS) sold $700 million in bond issue to pay the unfunded liability the state had in the WRS. This was not an “accounting gimmick” – by statute, the state is obligated to pay that debt to WRS; as WRS is even empowered to sue the state to collect any outstanding debt that remains unpaid.

In addition, the “unused vacation time” payment referenced in the PSI article was a legislated obligation to pay retirees their unused sick leave benefit – which is part of the employees negotiated salary and benefit package. The $782 million bond issue to pay that liability was used primarily by retirees toward a health benefit option post-retirement. Only the $700 million was pension benefit – and only for state employees. The total of 2003 Taxable Fixed Rate $1.8 Billion bond issue can be seen at this link.

In 2008 (same link as above), the bond issue was replaced by a “Floating Rate” bond during the economic downturn. According to the Capitol Finance Office (CFO), the debt was again restructured as part of Scott Walker’s budget and will be paid down through 2030. This debt in no way affects the WRS, and (according to a CFO actuary) was a sound fiscal measure to sustain the WRS during a difficult economic downturn.  A 2009 Legislative Fiscal Bureau analysis  showed the remaining unfunded liability in the WRS (primarily due to local government employers) to be $193 million. Today, that liability is only $195 million; only .2% of the fund’s value.

The accounting practices concern raised by MI and PSI include criticism of the GASB as “financially illiterate.” The Board members of the GASB give every indication of being highly literate fiscally, and have recently updated pension accounting practices.  The MI plan would have pension funds “discount rate” (or rate of return on investment) based on Treasury Bond interest rates – a very low rate at the moment, about 2%. This is a politically convenient measure, as it would greatly undervalue the WRS. Fiscally irresponsible, as T Bonds are every bit as volatile as the Stock Market (the rate was over 15% in the early 1980’s):

The reason is to mitigate risk in the market:

There is nothing wrong with having a target or “expected” rate of return on investments, but the risk associated with those investments needs to be taken into account. The WRS might achieve 7.2% average returns, but it must pay its promised pension benefits regardless. (Jason Richwine, Heritage Foundation, Milwaukee Journal Sentinel Op-Ed May 30, 2012)

Here is the problem with that fiscal reasoning. First – it plays on the now ingrained fear the average citizen has in the Market. It compounds that fear by ignoring the historical precedent of the WRS, and falsely stating that allowing employees to opt out of WRS and into a private 401(k) will be a safer investment with better return. There is absolutely no basis to that claim. In fact, while history is no guarantee of continued success; it is instructive to look briefly at the WRS history of responsible management and returns.

Every year the WRS “discount rate” is analyzed by state and private actuaries. The current rate of 7.2% is not only one of the lowest in the country – it has been reduced every year for the past decade to reflect long-term returns. AEI’s Andrew Biggs states that he doesn’t want pension funds to “not invest,” “just don’t expect a return over 3%.”

For someone who supports having government run as a business, a question for Mr. Biggs – Does any corporation make an investment if they believe it will only return 3%?  Of course not. Most companies expect at least 8-11% – the typical annualized return for the S&P 500. Angel Investors into venture capital expect a 25-34% return. Wisconsin has managed its pension fund exactly the way it was set up to function – paying every dollar of every benefit owed to WRS retirees, with pensioners and the fund return adjusting annually to the market. As of 2011, the fund value is $77 Billion, and pays out $5 Billion annually.

Under scenarios and programs lobbied for by MI, PSI, Heritage foundation, and TIAA-CREF – the WRS would see increased contribution rates necessary to fully fund the plan – with heavier burdens on municipalities and employees. Employees would demand an alternative to these higher contributions, and companies like TIAA-CREF would be ready with a state 401(k) option that would be “no risk.” That would be the end of the WRS as fund balances would shrink as employees opt out; and retirees would be stuck in a system that pays them less and less for their years of service.

The questions have been answered. Just as the same right wing think tanks are promoting the myth of austerity, they are now fostering fear and doubt about the WRS – at a time when it is sound. Scott Walker played this game with the “budget deficit” and unemployment numbers already. The outcome of the November election will decide if the political opportunity and will exists to push the desired reform through. Why?

Just as with collective bargaining – this is not fiscal, nor is it good governance. It is ideological – part of the crusade. The people driving this agenda are the people Scott Walker pledged allegiance to – billionaire banksters, Wall Street, moneyed corporate interests and investment brokerages. Companies like TIAA-CREF will make millions of dollars getting just a piece of the $77 Billion WRS pie – and they want in. If they succeed in sweeping the November election, the door will be ajar for reform.

No one expected Act 10. Scott Walker said he would “negotiate with labor” several times during the 2010 campaign. During the recall campaign, he said repeatedly that he had “no interest” in changing Wisconsin’s pension system. Follow the money. Follow the actions and writings of those who hold sway over Scott Walker and the GOP in Wisconsin.

Do you believe him?

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