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Public employee pension funds have better year
Journal Sentinel Posted: Jan. 2, 2010 After a disastrous 2008, Wisconsin's three major public employee pension funds rebounded during the first 11 months of 2009. But the repercussions of the stock market collapse of a year ago will be felt for years to come because of "smoothing" requirements that cause the losses to be absorbed over several years. That will translate into pension benefit cuts for most state and local government retirees and continued spending cuts or tax and fee increases for Milwaukee's city government. During 2008, the state retirement system, which covers most state and local government employees, fell from $80.7 billion in its biggest fund, known as the Core Fund, and from billion to $57.8 $7.1 billion to $4 billion in its more aggressive Variable Fund. Those totals include benefit payouts; market losses were 26% for the Core Fund and 39% for the Variable Fund, compared with a median 25% loss in a nationwide survey of public pension funds. Stock market losses were the main factor slicing about one-third of the value of the Milwaukee city and county pension funds. The city fund - which also covers employees at several other local governments - dropped from $5.1 billion at the beginning of 2008 to $3.43 billion at the end of that year, while the county fund fell from $1.66 billion to $1.16 billion in the same period. Excluding benefit payments, losses were comparable to the state's Core Fund and the national median. The state's pension fund improved in 2009, but many state and local government retirees will likely see reductions in their monthly payments this year. Through November, the Core Fund saw returns in 2009 of 21.1% and the Variable Fund gained 30.4%, according to the state Investment Board. At the end of November, the Core Fund was worth $67.4 billion and the Variable Fund stood at $4.9 billion. "We stick to our asset allocation and we stay in the market for the long term," said Vicki Hearing, a spokeswoman for the state Investment Board. "This is key to our strategy, to stay disciplined." But monthly payments for retirees from the Core Fund are based on the performance of the fund over a five-year period, and the severe losses of 2008 will dampen that average and force reductions. Retirees got the first taste of cuts in 2009, when payments dropped 2.1% for the largest pension fund. All pension participants are enrolled in the Core Fund. They can elect to put up to half of their pension contributions in the riskier, all-stock Variable Fund. Preliminary numbers from the state Department of Employee Trust Funds suggest Core Fund payments will be cut another 1.4% to 2% in 2010. Final figures won't be known until spring, after state officials analyze the fund's 2009 performance. Variable Fund payments were cut 42% in 2009 because of the fund's losses in 2008. Payments for that fund are expected to go up in 2010 because those changes are not smoothed out over five years, as they are in the Core Fund. Any changes to payments will take effect in May. Monthly checks for retirees average $2,200. Employees are guaranteed a set amount when they retire and typically see annual increases because of gains in the pension funds. The recent reductions cut into those past increases. The funds cover about 557,000 employees and retirees. For the local funds: City: Through Nov. 30, the city fund posted a 21% return on its investments, climbing to $3.91 billion in assets, after subtracting about $225,000 in benefit payments, said Thomas Rick, the city retirement system's chief investment officer, and Executive Director Jerry Allen. Those results outperformed the market benchmark, which was just under 18%, Rick noted. "The market rally has helped us a lot," Allen said. "We're feeling better about 2009," with December results still to be tallied, he added. But it's still too early to project the impact on the city's 2011 contribution to the pension fund, Allen warned. By ordinance, the city is required to keep enough money in the pension fund to meet 100% of its future benefit obligations. The 2008 losses knocked the city fund below that level, forcing a $49 million contribution after 10 years with little or no employer contribution. Mayor Tom Barrett and the Common Council then cut spending in other areas and boosted fees and property taxes to balance the 2010 budget. Actuarial calculations will determine whether the city fund has enough money to satisfy the requirement for 2009, Allen said. But even if pension obligations are fully funded, the city contribution will rise in 2011 because of the formula used to spread out the 2008 losses. County: Milwaukee County's pension fund has regained what was lost in 2008 - standing at $1.8 billion as of late November - thanks to two factors. The county fund grew by nearly $400 million in March from proceeds of the sale of pension obligation bonds approved by County Executive Scott Walker and the County Board. This year's market rebound added $183 million more. "We've had a good year," said Gerald Schroeder, county retirement system manager. "We've had a couple of good quarters and expect some more good quarters in 2010." Even with the 2008 losses, the county fund has grown an average of 4.4% annually over the past five years, according to an analysis by Marquette Associates, the county fund's financial adviser. The infusion of pension bond money brought the county fund back to where it was before it lost ground to the recessionary economy, Schroeder said. The county borrowed the $400 million as a way to stabilize its annual pension costs and in the hope of earning more through reinvesting the pension bond proceeds. After borrowing the money at about 6.2%, county officials hoped to reinvest it at 8%. So far, the $400 million has done better, with those investments growing in value by nearly 20%, said a report by Marquette. City officials have been leery of the pension bond approach. They have said it would be too risky, unless federal law is changed to return such bonds to the tax-exempt status they held before 1986. Unlike the city, the county is not required to keep its fund at 100% of obligations. Larry Sandler and Steve Schultze reported from Milwaukee and Patrick Marley reported from Madison. |
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