Because of my occupation, I have spent the last two decades or so, among other duties, preparing a public employee retirement system annual financial report for my employer that is audited by a reputable public accounting firm. The report is prepared in compliance with generally accepted accounting principles (GAAP) under accounting standards developed by the Governmental Accounting Standards Board (GASB). In addition, my employer engages an independent actuarial firm to prepare and certify an annual actuarial valuation of the retirement plan that is prepared under generally accepted actuarial principles and standards. With the war on public employees and state government raging in Wisconsin, I heard that the former Democratic governor turned over not only a balanced budget but also a well funded pension system to the incoming Republican governor. Given the unprecedented attack on Wisconsin public employees, I decided to review the Wisconsin Retirement System comprehensive financial annual report (CAFR).
Wisconsin Retirement System CAFR's
State budgets are exceedingly complex and typically full of budgetary maneuvers unique to the state that I couldn't pretend to confirm how well balanced Wisconsin's budget is. However, I do know how to read a PERS CAFR (public employee retirement system comprehensive annual financial report) and determine fairly quickly how well funded the system is and what its future prospects are. In the case of the Wisconsin Retirement System, I am convinced that the system is well funded and certainly not leading the state of Wisconsin to fiscal insolvency. One can reasonably debate whether a state can afford to make rising employer contributions to a retirement system. However, there are many reasonable adjustments that can be made to stabilize that burden. Nevertheless, the Wisconsin Retirement System is well funded at this time. The following paragraph by the system's independent professional actuary, Gabriel Roeder Smith & Company, in its actuarial certification reads:
"Based upon the results of the December 31, 2009 valuations, we are pleased to report to the Board that the Wisconsin Retirement System is meeting its basic financial objective and continues to operate in accordance with actuarial principles of level percent of payroll financing. Investment performance at least in line with assumptions continues to be important for the WRS as it is for virtually every other retirement system. WRS is fortunate to have mechanisms in place that will help it deal with the investment losses that occurred in 2008."
The funded ratio of the system, actuarial assets divided by actuarial accrued liabilities, is 99.8%. That is remarkable given the financial crisis of 2007-2009. Moreover, in the funded ratio chart that displays ten years of history, the system funded ratio ten years ago was 96.0% so the funded ratio has actually gradually improved over that ten year period. Remarkable again given the economic and investment landscape over that time horizon.
So it begs the question: if the new Republican governor inherited a balanced budget and a sound retirement system, what caused the immediate fiscal crisis in his state? Was it his huge tax cut? Did he believe that tax cuts are budget neutral? Have we seen that movie many times at the federal and state level and it's always bad?