Did Wisconsin Have a Problem?

Politics the latest risk for public pension funds.

February 24, 2011

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278000_madison_wisconsin__1From the New York Island to the California shore, benefits for public workers, including pension and health care entitlements, are under scrutiny, and in some instances under threat.

To bridge a budget gap, Wisconsin Governor Scott Walker has proposed double health care premiums to 12.6% and forcing public employees to contribute 5.8% to their pensions. But he has also proposed stripping away all bargaining rights exempt the right to bargain wages.

The looming pension crisis in the in the public sector is not new; it has been papered over in good times, with rising tax revenues and actuarial assessments not notable for their rigour. What’s changed, however, is two things. First, the financial crisis left pension plans with overly optimistic return assumptions as collateral damage. And a new breed of politician is occupying the state house, determined to pare back spending.

In most cases, spending cuts are unavoidable. U.S. states can’t run deficits. Wisconsin faces a $137 million deficit this year and a $3.6 billion deficit next year.

And in some cases, the chickens have come home to roost. In Prichard, Alabama, the pay Peter the municipality has halted pensions to Paul. The pension plan ran dry in 2009. And some state pension plans are in dire straits, including Illinois and Kansas.

Still, Wisconsin faces no such difficulties. Pension Pulse found this on Huffington Post:

“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.”

That’s not to say that some states won’t need drastic changes. The Pew Center for the States estimates the U.S. has a $1 trillion pension deficit, over $60 billion in each of California and New Jersey. The report notes:

“While recent investment losses can account for a portion of the growing funding gap, many states fell behind on their payments to cover the cost of promised benefits even before the Great Recession. Our analysis found that many states shortchanged their pension plans in both good times and bad, and only a handful have set aside any meaningful funding for retiree health care and other non-pension benefits. “In the midst of a severe budget crisis—with record-setting revenue declines, high unemployment, rising health care costs and fragile housing markets—state policy makers may be tempted to ignore this challenge. But they would do so at their peril. In many states, the bill for public sector retirement benefits already threatens strained budgets. It will continue to rise significantly if states do not bring down costs or set aside enough money to pay for them.”

Well the states aren’t ignoring them now. Whether they reform public pensions, however, depends on another risk factor: politics.

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