As required by the 2011-2013 state budget, the state Department of Administration (DOA), the state Department of Employee Trust Funds (ETF), and the Office of State Employment Relations (OSER) released a joint study today on the Wisconsin Retirement System (WRS).
In particular, the budget required that the study consider the impact of creating an optional defined contribution, 401(k)-style retirement plan and the creation of a money purchase annuity for employees who choose not to pay the currently required employee contribution. Here is the study’s concise recommendation:
Given the current financial health and unique risk-sharing features of the [Wisconsin Retirement System], neither an optional [defined contribution] plan nor an opt-out of employee contributions should be implemented in Wisconsin at this time.
According to a statement released by the Governor’s Office in reaction to the study’s release today, Governor Walker is planning to abide by the recommendation of the study and not propose any “substantial” changes to the WRS. According to the Governor:
The report released today confirms that both taxpayers and pensioners are getting a great deal with the WRS. Compared to other states, Wisconsin consistently rates among the best performing public pension systems in the country. … I want to be very clear: I am currently not planning to make any substantial changes to the WRS. However, I will continue to work to ensure that the WRS is fiscally sustainable for both taxpayers and retirees.
The study found the WRS to be stable and well-funded. And this is nothing new. Throughout the past twenty years, the study found that the WRS has been funded at over 90 percent, and the funding level has been nearly 100 percent since 2004. Recently, the Pew Center on the States came to the same conclusion in a study of its own, identifying the WRS as the only public pension in the country at a 100 percent funding level.
An important feature of the WRS highlighted in the study, one that is significant for both policy and political reasons, is the risk-sharing structure that is fairly unique among public pension systems. The way the WRS is set-up, members (i.e., public employees) bear 75 percent of the investment risk while taxpayers only bear the remaining 25 percent of the risk. This is in large part because of the way benefits paid to WRS retirees are tied to investment returns rather than automatic cost of living adjustments, as is the case with many other pension programs. To be sure, between 2008 and 2011, as the economy hit the downturn, WRS retirees have had their pension benefits reduced by over $3 billion. And, according to a national survey highlighted in the study, state and local budgets in Wisconsin only allocate 1.26 percent to retirement costs versus the national average of 2.9 percent.
While creating defined contribution or money annuity plans would further reduce taxpayer exposure, and effectively eliminate it if they were the only options, the study projects there would be a significant cut in returns due to the loss of pooled investments in favor of individual investments, and the loss of professional management that comes with a pension system. National surveys cited by the study have found that defined contribution systems average 1 percent less in returns than pension systems. If the current WRS is retained with a defined contribution or money annuity plan as an option for employees, the study finds that the contribution rate for those remaining in the WRS may need to increase to make up for the loss in overall investment capital. In addition, there are other costs the state would need to incur, from initially setting up the optional plans to managing the multiple benefit structures, including the possibility of employee changes from one system to the other.
Ultimately, the study found that the shared investment risk and funding responsibilities of the current WRS provides taxpayers with protections similar to a defined contribution system while providing public employees with the strong benefits of a pension system.
Although considering changes to the Supplemental Health Insurance Credit Conversion (SHICC) program, often referred to as the sick leave “doubling” program, was initially supposed to be part of the WRS study, that was removed when the study requirement was shifted from the governor’s budget repair bill to the biennial budget bill last year. It is unclear if any changes are being considered for the SHICC program, which is defined as part of the state compensation plan. The current compensation plan runs through June 30, 2013, like the state budget, although changes are possible via a request by the Office of State Employment Relations (OSER) to the Joint Committee on Employment Relations (JOCER). For more on sick leave conversion, see this previous post.
Efforts by the UW System and its institutions to convince the Department of Administration (DOA) to decrease the budget lapse allocation for the 2011-2012 fiscal year were unsuccessful. Late last week, the DOA submitted its $123 million lapse proposal for FY 2012, which includes a $46 million lapse, or roughly 38 percent of the total, for the UW System.
The 2011-13 state budget required the DOA to submit plans for $174 million in lapses over the biennium, meaning that $51 million in additional lapses will come later in the biennium, likely in 2012-13. However, the DOA has indicated that it may need to request an additional $126 million in lapses (for a total of $300 million) over the biennium in the event that state revenue projections fall short.
In mid-December, the UW System presented a memo to the DOA indicating the general impact of the proposed budget lapse, including possible cuts to instructional staff, student services such as academic advising, outreach and continuing education initiatives, and new degree and certificate programs. The memo requested an alternative lapse amounting to 22 percent of the total rather than 38 percent, which is still about triple the 7 percent allocation the UW System receives from state GPR funds. The DOA, however, rejected the proposed alternative, largely because it would have required increasing the allocation for some other state agency or agencies and likely risking push-back from those areas.
At this point, the DOA lapse proposal is in the hands of the Joint Finance Committee (JFC). The JFC has a 14-day passive review period in which the co-chairs, Sen. Alberta Darling (R-River Hills) and Rep. Robin Vos (R-Burlington), have the ability to hold a hearing for the committee to hear testimony and vote on the proposal. If no hearing is called, the proposal is automatically approved after the 14-day review period. Although the proposal was formally submitted to the JFC on December 23, the passive review period runs until Friday, January 13, likely because of the holidays.
According to an article in the Journal Sentinel, Rep. Vos has already indicated that a JFC hearing and vote will be held in early January on the lapse proposal in order to “make sure those programs are not going to have the core services reduced.” Specifically, the article notes that Rep. Vos is concerned about cuts to economic development, sex offender programs, and aid to counties for juvenile criminal offenders.
At another legislative hearing on the budget lapses in early December, UW-Milwaukee Chancellor Mike Lovell stressed the negative impact of the proposed lapses on the ability of UWM to meet the expectations of businesses and other partners who have invested money in collaborations with the campus in recent months and years. This message, in addition to those that stress the negative impact of the lapses on graduation and retention rates, have the potential to carry particular weight with legislators concerned, like Rep. Vos, about economic development.
That said, any reduction in the allocation to UW System imposed by the JFC would require additional lapses for other state agencies, since the total lapse amount of $174 million is required by the state budget, thereby posing political challenges for any significant changes in the DOA proposal.
New state revenue projections for the 2011-13 biennium are expected in late-January, which is when more will be known about whether the DOA will need to request lapses above the $174 million. The non-partisan Legislative Fiscal Bureau typically provides revenue estimates to the legislature in January of even-years and in January and May of odd-years.
The Senate Committee on Agriculture, Forestry, and Higher Education will hold a hearing today in Madison on the challenges facing the UW System heading into 2012. The hearing is open to the public, but only invited speakers — which include administrators and chancellors from across the UW System — will be allowed to address the committee.
Although the hearing topic is stated generally, there’s little question that the $65.6 million in proposed budget lapses for the UW System will dominate the conversation. It is worth noting, however, that this is not the exact public hearing that UW System officials are pushing to get, which is a hearing of the Joint Finance Committee (JFC) that actually has the authority to act on the budget lapse proposal.
Nevertheless, the hearing does present an opportunity for officials representing campuses across the UW System, including Chancellor Mike Lovell from UWM, to express in a legislative forum the impacts that the lapse will have, if not changed.
The Senate Committee on Agriculture, Forestry, and Higher Education is the committee in the Senate that has jurisdiction over issues related to higher education, and it’s chaired by Sen. Dale Schultz (R-Richland Center). Other members include Sen. Sheila Harsdorf (R-River Falls), Sen. Neal Kedzie (R-Elkhorn), Sen. Terry Moulton (R-Chippewa Falls), Sen. Dave Hansen (D-Green Bay), Sen. Jennifer Shilling (D-La Crosse), and Sen. Jessica King (D-Oshkosh). Sen. Harsdorf is the only member who also sits on the JFC.
The budget lapse proposal is not currently on the JFC list of passive review items, so presumably the 14-day review window has not started, yet. It is likely the JFC co-chairs are restricted from calling a public hearing until the committee receives the formal proposal from the Department of Administration. There is no clear timeline for the the submission of the proposal, or any indication whether either of the co-chairs intend to call a hearing on it. See more here.
As discussed in a previous post, the Department of Administration (DOA) recently allocated a $65.6 million budget lapse to the UW System, accounting for 38 percent of the $174.3 million in budget lapses required by the 2011-13 state budget.
The lapse requirement caught the UW System off-guard because the percent of budget lapses allocated to the UW System generally hovered in the 8-10 percent range in recent bienniums, mirroring the percentage of the state General Purpose Revenue (GPR) budget that the UW System receives (roughly 7 percent).
The breakdown of how the allocation translates into cuts for each campus can be found here. The cut for UWM is slated at $8.8 million.
In addition, the DOA only granted state agencies, including the UW System, a matter of weeks to develop a plan to deal with the lapses, as opposed to 6-9 months as with previous biennial lapses. The letter from DOA Secretary Mike Huebsch to state agencies regarding the lapses was dated October 14, while plans were due back to the DOA by yesterday, November 7.
From this point, the DOA will review, approve, and consolidate the plans into a single lapse request that will go to the Joint Finance Committee for a 14-day passive review. During that 14-day period, members of the committee will be able to object to the request, but it will be up to the co-chairs — Sen. Alberta Darling (R-River Hills) and Rep. Robin Vos (R-Burlington) — to determine if a public hearing is held. If no hearing is held within 14 days, the request will stand as approved. If a hearing is held, the committee will vote to approve or reject/modify the request.
It is unclear how quickly the DOA will move to review and consolidate the state agency plans into its request to the JFC. However, it is not to early to voice your request to members of the JFC, particularly the co-chairs, to hold a public hearing on the proposed lapses.
Contact information for all JFC members can be found here (click on the member name to see email, phone, and mailing contact info). See this website to determine if any of the JFC members are your representatives.
Please note, however, that you are not restricted to only contacting your representatives. For instance, JFC co-chair, Sen. Alberta Darling, represents the 8th Senate District, which currently encompasses the area immediately surrounding the UWM campus, making her one of the primary representatives for the UWM community.
Some points to keep in mind if you choose to contact a JFC member on the budget lapse issue:
- The UW System has already withstood a $250 million GPR cut in the 2011-13 state budget, leading any significant additional cuts to threaten the core services provided by the various UW institutions at a time when those campuses are educating near-record numbers of students.
- As the Goldwater Institute found in a report earlier this year, UW-Milwaukee is already one of the most administratively lean institutions in the country, public or private, and the $8.8 million cut to UWM as part of the lapse could have a severely negative impact on the institution that educates the most Wisconsin residents in the state and currently stands at near-record enrollments.
- As demonstrated in the 2011-13 state budget and biennial budgets in the past, the UW System is not unwilling to share in the burden of state funding cuts, but a budget lapse allocation (38 percent) that is so dramatically out of step with the UW System’s GPR allocation (7 percent) further puts at risk the state’s attempts to increase its number of bachelor degree holders to compete and participate regionally, nationally, and globally in the knowledge economy.
- What is being requested is not an automatic reversal or alteration to the DOA request, but rather for the Joint Finance Committee to honor the spirit of openness and transparency on such a significant budgetary matter by holding a public hearing where all of the issues at stake can be considered in an open forum.
Yesterday, the Office of State Employment Relations (OSER) released the 2011-13 state compensation plan. The full plan can be found on the OSER website.
The biggest changes in this biennium’s compensation plan are related to the migration of benefits previously maintained in collective bargaining agreements, which have now reverted to the compensation plan since the budget repair bill stripped the rights of most state employees to bargain on anything but wages.
According to OSER Director Gregory Gracz in a letter to all state employees:
It is important to note that very little is changing in the Compensation Plan from the former collective bargaining agreements in terms of employee base pay, supplemental pay, and benefits. Provisions covering base pay, vacation, and sick leave, including sick leave conversion credits, remain largely unchanged and are generally the same or slightly modified versions of provisions that used to be included in collective bargaining agreements. Also, the vast majority of pay progression and supplemental pay and differential provisions from the former contracts were incorporated into the new Compensation Plan with only minor changes in some areas. For the most part, the modified language results in consistency and equity in application of pay and benefit provisions across employee groups.
As expected, the compensation plan does not include funding for any base pay increases for state employees over the biennium. However, relating to UW unclassified employees, OSER does recommend increasing pay ranges for select senior executive groups by 2 percent and granting the Board of Regents the authority to adjust the Academic Staff salary schedule (Category A and Category B) by up to 2 percent. The last adjustment for the Academic Staff salary schedule came as part of the 2007-2009 compensation plan.
Although the recommendation is to grant the Board of Regents authority to increase the salary schedule for Academic Staff, no additional funding is coming to the UW System to provide any actual increases in pay to Academic Staff or other employees.
(NOTE: Each UW institution already has the ability to make adjustments to faculty minimum salaries.)
Another point of interest in the 2011-13 compensation plan includes the fact that no changes were recommended related to the Supplemental Health Insurance Credit Conversion (SHICC) program. This is the program that allows retirees with 15 or more years of service to receive a match (essentially doubling) on their sick leave credit conversion. The potential for changes to the SHICC program in the 2011-13 compensation plan, particularly now that the benefit was no longer codified in collective bargaining agreements for most classified employees, was a major concern for state employees throughout the uprisings related to the budget repair bill earlier this year.
From here, the compensation plan needs to be approved by the Joint Committee on Employee Relations (JOCER). If approved, the plan will go into effect on January 1, 2012.
It’s important to keep in mind that any of the recommendations in the 2011-13 compensation plan, even if approved without change by JOCER, can be revised at a later time during the biennium by request from OSER to JOCER. The most notable occurrence of this in recent years was the rescission of the 2 percent pay increase that was initially approved for UW faculty and academic staff as part of the 2007-2009 compensation plan.
In related news, while the SHICC program was left alone in the 2011-13 compensation plan recommendation by OSER, a press release by the conservative MacIver Institute last week suggests that changes could be in the works for the Accumulated Sick Leave Conversion Credit (ASLCC) program. This is the base conversion program that allows retirees a one-to-one conversion of sick leave hours to credits to pay state health insurance premiums during retirement. ASLCC is based in state statutes and therefore would require action by the state legislature and governor to change.
The MacIver Institute release from last week includes quotes from a number of Republican state legislatures expressing significant concern about the program and announcing plans to change it. According to Assembly Speaker Jeff Fitzgerald (R-Horicon): “[W]e should lead by example and take a closer look at the benefits legislators have. Representative Howard Marklein [R-Spring Green] is already working on a bill to do just that.”
Proposals have been made in the past to eliminate the program for state legislators as well as all elected officials in the state. The quote by Rep. Fitzgerald indicates the changes being considered now are along those lines, as opposed to changes that impact all state employees, but the “lead by example” phrase suggests extending the changes to other employees in the future is being considered.
As part of the 2011-13 state budget, the legislature and governor charged the Department of Administration (DOA) secretary with lapsing $174.3 million from executive state agency funds over the course of the biennium. Lapses are one-time cuts in funding.
Just last week, the DOA announced how those lapses would be distributed among the state agencies, including $65.6 million in cuts for the UW System. This comes on top of the $250 million in base budget cuts over the biennium that the UW System was allocated in the state budget.
A UW System statement from today points out that while the System only accounts for about 7 percent of the total state GPR budget, the $65.6 million in one-time cuts it is being asked to take on amounts to 38 percent of all the lapses required by the state budget. The statement continues:
We do not know how we can take these cuts without negatively affecting the education of our students and the expectations of their families for a quality experience. These disproportionately large cuts will hurt every UW institution’s ability to spur regional economic growth and to help all of Wisconsin emerge from a persistent economic recession.
The breakdown by campus can be found in today’s UW System release, with the UW-Milwaukee cut coming in at $8,850,331.
The Joint Finance Committee (JFC) still needs to review the lapse allocations before they are final. However, it is a passive review, meaning the JFC has 14 days to raise an objection to the DOA proposal, otherwise it takes effect. If an objection is raised by a committee member in the 14-day period, the committee will meet to review and formally vote on the proposal.
According to UW System’s statement today, it intends to appeal for a reconsideration of the lapse distribution.
Contact information for the all sixteen JFC members can be found on the committee’s website, where you can also find a running list of the passive review requests the committee is set to consider. The DOA lapse proposal is not currently listed on the site, meaning the 14-day review has not started, but it is not too early to contact JFC members about the proposal.
UPDATE: For additional information on the lapses, including possibilities raised in the DOA letter to UW System that additional lapses could be coming later, see this post from the Campus Connection blog at the Capital Times website. According to the DOA letter, the additional lapses could increase the UW System cut to as high as $113.3 million.
UW-Madison Vice Chancellor for Administration, Darrell Bazzell, is quoted as suggesting the lapse letter from the DOA could indicate that upcoming revenue projections for the state may be looking down, assuming the lapses are about balancing the state budget that was thought to be balanced with the passage of the biennial budget.
Governor Scott Walker issued 50 partial vetoes yesterday prior to signing the 2011-13 biennial budget. Some of the vetoes pertaining to the UW System and state employees include:
- Eliminate WERC Approval of UW Position Classifications: The governor vetoed a provision in the budget that would have given the Wisconsin Employment Relations Commission (WERC) the authority to determine if new positions created by the UW System or UW-Madison were more appropriately unclassified or classified staff. It is unclear if this authority now reverts back to the Office of State Employment Relations (OSER) or if it is going to rest solely with the UW System and UW-Madison.
- Delete JFC Authority to Extend Telecommunications Provisions: The provision in the budget bill that prevents the UW System or its campuses from participating in associations or consortia that provide telecommunications services, such as WiscNet, was set to take effect on July 1, 2013, unless a change in law or a vote by the Joint Finance Committee (JFC) to delay further the implementation. The governor’s veto removes the ability for the implementation to be delayed by virtue of a JFC vote. This move requires any plans to delay or eliminate the provision to receive approval of the governor, barring a supermajority in the legislature that can override a gubernatorial veto. If the recall elections this summer swing the Senate to the Democrats and the general election in 2012 swings the Assembly to the Democrats, this move could have significant implications.
- Eliminate Percentage Phase-In for WRS Vesting Period: The budget bill included a provision that establishes a 5-year vesting period before employees can access the full employee and employer contributions in their Wisconsin Retirement System (WRS) account. That provision also included a phased-in percentage of the employer contribution that the employee could access if leaving the system between 1-5 years: 20% after one year, 40% after the 2nd year, 60% after the 3rd year, 80% after the 4th year, and 100% after the 5th year. The governor’s veto eliminates this phase-in and only allows employees leaving prior to 5 years to access their employee contributions.
- Alter State Group Health Insurance Study Due Date: Included in the budget was a provision to require a study of state group health insurance options, including the possibility of moving to high deductible health plans. The due date for this study was October 31, 2011, in an attempt to have the results in time to implement recommendations in the 2012 calendar year. However, since the Group Insurance Board is currently in the process of establishing options for 2012, the governor vetoed the October 31 due date because it would be unrealistic and impossible to make any changes to the 2012 options after October 31.
- Remove Regents Oversight for UW-Madison Employment Plans: The budget bill allows both UW System and UW-Madison to develop separate plans for personnel systems, compensation plans, and tentative labor agreements, with both going through the Board of Regents for approval before going to the Joint Committee on Employment Relations (JOCER) for final approval. The governor’s veto removes the need for plans developed by UW-Madison to go through the Regents, and instead sends them directly to JOCER.
- Implement New Bid Threshold Immediately and Across Agencies: The budget bill includes a provision that doubles the procurement bid threshold (the point at which a procurement is required to go to bid) from $25,000 to $50,000 for the UW System, with an implementation date of July 1, 2013. The governor’s veto extends this threshold level to all state agencies, and puts the new threshold into effect immediately.
- Require Procurement Reporting for UW System: The budget bill did not require UW System to annually report on procurement of contractual services. The governor’s veto requires such reporting for the UW System on an annual basis.