Wisconsin: Stock market losses result in pension check cuts!

From John Curry, November 2, 2008
Retirees should expect decrease in state pension fund checks

Milwaukee Journal Sentinel

By Cary Spivak of the Journal Sentinel

Nov. 2, 2008

For the first time in its 26-year history, the state's multibillion-dollar public employee pension fund is preparing to reduce monthly payments, making about 150,000 retired government workers the latest in a long line of stock market victims.

Taxpayers are also expected to take a hit, as the Department of Employee Trust Funds is warning municipalities, counties, school boards and the state that they will have to boost contributions to the pension fund that covers approximately 540,000 active employees and retirees. Governments, on average, contribute about 10.4% of their payroll to the Wisconsin Retirement System, a figure that will likely hit about 10.9% in 2010 if the market value of the state pension fund falls by 20% this year.

"That's huge," Ed Huck, director of the Wisconsin Alliance of Cities, said Friday. "That will mean a few people out of work." Huck predicted that many governments will have to lay off employees to cover the increased pension contributions.

Unprecedented stock market volatility is to blame for the woes of the pension fund that covers state workers as well those employed by local governments across Wisconsin.

"The markets have never been this bad for the Core Fund in the history of the fund," said David A. Stella, Department of Employee Trust Funds secretary.

The fund has lost 15.1% through Sept. 30 - the most recent data available - and had $67.3 billion on that date, according to the State of Wisconsin Investment Board, which manages the pension funds. The Core Fund had $73.5 billion on Aug. 31, and all employees and retirees have at least half of their money invested in the giant fund.

Even in 2000, the last time payments to retirees were frozen, the fund was down only 8.8%, Stella said.

Reductions to come

Pensioners won't know until spring how much their checks will shrink, effective May 1. Monthly payments will likely drop about 1.3% if the SWIB Core Fund ends the year down 20%, Stella said, noting that the decline jumps to about 3.5% if the fund loses 30%.

The average state retirement system pensioner receives $1,791 monthly, or about $21,500 annually, said Matt Stohr, department spokesman.

Stella declined to forecast how the SWIB-managed funds will fare for the rest of the year.

"At one point we were looking at minus 20 percent returns for the year," Stella said. "Then it started to come back slowly, but it's pretty volatile."

SWIB officials declined to estimate how much was lost in October, one of the worst months financial markets have ever seen. The Dow Jones industrial average closed the month down 14%. The October figures will be available this week, said Vicki Hearing, SWIB spokeswoman.

To prepare retirees for the decline in monthly pension checks, Stella and Keith Bozarth, SWIB executive director, recently sent a letter to all retirees as well as governments around the state whose workers are covered by the fund.

"Because of the size of recent market declines, and if market conditions do not improve, retirees should be prepared for some reduction in Core Fund annuities next spring," they wrote.

The letter notes that the retirement fund "is, and will remain, solvent and able to provide retirement benefits long into the future."

Marty Biel, executive director of the American Federation of State, County and Municipal Employees local that represents state employees, said the letter calmed many retirees who feared the worst.

"The folks still on edge are the ones who have half of their funds in the Variable Fund," Biel said, explaining that state workers are allowed to allocate 50% of their pension funds to that fund, which is more aggressive than the Core Fund.

The Variable Fund is a fraction of the size of the Core Fund. It has lost 21% of its value this year and had $5.2 billion on Sept. 30.

Biel predicted some of the folks who will be hardest hit by the expected pension cuts are those still on the job.

"People who were planning to retire next year before this meltdown started - they may not do that now," he said. "You'll see a lot of retirement plans change."

Created in 1982

The current state retirement system was created in 1982 to cover all government workers, with the exception of those employed by the City and County of Milwaukee. Retirees have seen their payments stay even or increase every year since then, Stohr said. Payments went up 6.6% last year.

Milwaukee County and City of Milwaukee retirees don't have to worry about cuts in their pension checks, officials said Friday. Separate city and county pension systems don't allow for potential payment reductions like the state system does.

The city fund has lost about $800 million of value from market losses this year and stood at $4.2 billion at the end of September. Additional significant losses on stocks are expected for October, but those figures aren't yet available, said Jerry Allen, executive director of the city pension system.

"This fund is rock-solid," Allen said. "The city will be keeping all of its promises."

The county pension fund has lost 12.7% of its value due to market losses since the start of the year and stood at $1.33 billion at the end of September.

Gerry Schroeder, manager of the county retirement system, said the county fund remains in good shape.

"Pensioners shouldn't worry," Schroeder said. "Hopefully things will turn around pretty soon."

If the city or county pension funds ever did go sour, local taxpayers would be required by state law to make good on retirees' pension checks, officials said.

Steve Schultze of the Journal Sentinel staff contributed to this report.