July 02--A much-anticipated report on the Wisconsin Retirement System cautions that making major changes to the highly rated fund could create greater costs for taxpayers while undermining benefits for hundreds of thousands of current and future retirees.

Authored jointly by Walker administration appointees and the semi-autonomous Department of Employee Trust Funds, the report released Monday morning warns against creating two new alternatives for public sector workers.

Gov. Scott Walker and the Republican-led Legislature last year mandated the study of system finances and structure, including the possible addition of a 401(k)-type option and the option allowing state and local workers to stop paying into the system.

Extensive actuarial studies over the last year indicate that either option would be costly and inefficient, while posing legal problems, according to the report, delivered to the Legislature's powerful budget committee Monday morning.

Adding a 401(k)-type defined contribution option probably would increase costs to taxpayers and employees while decreasing benefits to retirees, the report's executive summary states. There would be additional costs for death and disability benefits.

The opt-out alternative poses the same problems, and it could be difficult to win approval for such an option from the Internal Revenue Service.

"Neither an optional DC (defined contribution) plan nor an opt-out of employee contributions should be implemented in Wisconsin at this time," the 66-page report states.

Walker and Department of Administration Secretary Mike Huebsch issued statements acknowledging the findings while leaving the door open to future changes.

Huebsch pointed out a passage in the report pointing out that a defined contribution alternative would decrease risk for taxpayers because it would not guarantee a minimum benefit.

"The state will continue to look at potential options for reforming the current system because the work force of the future may not look like our current work force," Huebsch said. "Taxpayers deserve to have the best and hardest-working employees, and a 21st century work force may prefer portability of benefits and freedom offered by other retirement options."

In recent weeks, Walker has said he was open to changes that would maintain a strong Wisconsin Retirement System.

"I want to be very clear: I am currently not planning to make any substantial changes to the WRS," Walker said in a statement Monday. "However, I will continue to work to ensure that the WRS is fiscally sustainable for both taxpayers and retirees."

Some legislators will continue to push for changes that could weaken the pension system, but they will have a hard time finding support unless the market declines enough to seriously cut system investment income, said Jim Palmer, who leads a statewide retirees organization and directs the Wisconsin Professional Police Association union.

"Conservative lawmakers in Wisconsin and nationally like to say that people can invest their money better than the government, but this study shows emphatically that that is not true," Palmer said. "It demonstrates how tinkering with the system would increase taxpayer costs and hurt investment returns."

Leaders of the Legislature's finance committee, Rep. Robin Vos, R-Rochester, and Sen. Alberta Darling, R-River Hills, issued a statement lauding the pension system strengths:

"This review is extremely helpful as we begin to work on the next state budget and continue to make sure our retirement system is fair to the taxpayer and competitive in the global marketplace."

Retiree and employee groups have worried that the study was the first step toward taking the system apart and putting it in the hands of private fund managers.

Republicans in the Legislature have been split about making changes to the system, which is rated by the Pew Center on the States as the nation's only fully funded public pension.

Nationally, free-market think tanks have argued that public pension systems are too costly and said government should follow the lead of private companies, most of which have eliminated defined-benefits pensions over the last 20 years. Many state pension systems have given critics ammunition by failing to keep contributions from employers and employees in balance with benefit costs.

The financial market crash of 2008 has compounded the problems because pension funds rely on investment income, but most experts see that as a temporary problem.

The crash has created challenges for the Wisconsin Retirement System, but it remains the only fully funded plan in the country because state law reduces benefits when investment income drops, and statutes require setting annual employer and employee contributions based on exhaustive actuarial studies of the work force.

Earlier this year, Rep. Pat Strachota, R-West Bend, sponsored a bill that would have opened the door to 401(k) option for new hires that she said could make Wisconsin universities more attractive to top academic talent.

The existing retirement system is a strong recruiting tool for the University of Wisconsin System, said spokesman David Giroux. System salaries are below average, putting the university at a competitive disadvantage, but the pension system partially offsets that.

"We're very concerned about maintaining the viability of WRS for all of our employees and would want to know the impact of any changes before we took a position," Giroux said.

Employees already have the ability to save pre-tax dollars in individual retirement accounts, but the employer doesn't contribute to the accounts. Participation in the pension fund, which guarantees at least a minimum benefit for life after retirement, is mandatory under state law.

Under the law, the goals of the pension system are to ensure that retirees can maintain an adequate living standard with a benefit calculated based on salary, age and years of service -- the average amount is $23,000 a year -- combined with federal Social Security payments and other savings.

Strachota's bill failed to gain support, but she has said she hopes to revive it in the next legislative session.

TIAA-CREF, a Denver-based insurance provider, lobbied for Strachota's proposal, saying it would provide "portability."

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(c)2012 The Wisconsin State Journal (Madison, Wis.)

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