Wisconsin DETF - 1999 Wisconsin Act 11

Wisconsin Act 11 (hereafter "Act 11") was signed into law by the governor on December 16, 1999, and became effective on December 30, 1999. The Wisconsin Professional Police Association challenged the constitutionality of certain provisions in Act 11. The case went directly to the Wisconsin Supreme Court, and the Court issued an injunction that barred the Department of Employee Trust Funds from implementing any provision of Act 11.

On June 12, 2001, the Supreme Court issued a decision that upheld all provisions of Act 11 and lifted the injunction. The Department is making every effort to implement all provisions of Act 11 as quickly as possible. The legislation will be implemented retroactive to its effective date. This means that any benefits that have been paid from accounts that qualify for the provisions of Act 11 will be retroactively adjusted.

Following is a summary of the key provisions of Act 11 and how they affect WRS benefits:

Transfer of Funds from the Transaction Amortization Account (TAA) and Creation of a Market Recognition Account (MRA)

TAA Transfer: On December 31, 1999, after the regular 20% annual distribution from the TAA occurs, Act 11 requires that an additional $4 billion in unrealized gains (i.e. "paper gains") be distributed from the TAA into the Trust Fund reserves. As required by law for all distributions from the TAA, the $4 billion will be credited proportionately among the reserves of the Fixed Trust Fund.

The Employee Reserve – Active and Eligible Inactive Accounts: The portion of the unrealized gains transferred from the TAA to the Employee Reserve will be credited to employees in the form of a higher fixed effective interest rate credit for 1999. The $4 billion TAA transfer will increase the 1999 fixed effective rate by 10.6% above the fixed rate had the transfer not occurred. Since the 1999 fixed rate was 13.5% without the TAA transfer, it will be 24.1% after the $4 billion TAA transfer.

Special Note to Variable Participants: Transfers from the TAA do not affect Variable Trust effective rate interest crediting. However, the higher Fixed Trust effective rate resulting from the TAA transfer affects your "variable excess" balance. Your variable excess balance (shown on your annual Statement of Benefits) is based on a comparison of the actual total balance of your account, compared to what your total account balance would be if you had never participated in the Variable Trust. Consequently, the Fixed Trust effective interest rate will result in a lower variable excess balance. The variable adjustment to your formula annuity is calculated by multiplying the variable excess (or deficiency) balance in your account (including matching amounts for employer contributions) times a money purchase factor based on your age at the time your benefit begins.

Consequently, the lower your variable excess balance, the lower the amount that will be added to your monthly formula retirement benefit when you retire. However, if your retirement benefit would be higher under the money purchase calculation, since the higher fixed effective rate increases your total money purchase account balance, it has the effect of increasing your money purchase retirement benefit. In other words, the higher fixed effective rate for 1999 has the effect of increasing your money purchase retirement benefit, but will decrease the variable adjustment to your formula retirement benefit.

Please refer to the Calculating Your Retirement Benefit (ET-4107) and How Participation in the Variable Trust Affects Your WRS Benefits (ET-4930) brochures for more detailed information on these calculations.

The Employer Reserve: Of the total amount credited to the Employer Reserve, $200 million will be used to create separate "credit balance" accounts for each WRS employer. Each employer's share of the $200 million is calculated based on that employer's percentage of the total covered WRS payroll in 1998. If an employer is paying a monthly contribution for that employer's actuarial accrued unfunded liability, that contribution is deducted from the employer's credit balance account until the liability is paid or the balance is exhausted.

If the employer has no remaining unfunded actuarial accrued liability to the Trust Fund, or an employer's unfunded liability is paid in full before that employer's credit balance is exhausted, the employer's normal monthly required contributions are deducted from the credit balance account until the balance is exhausted.

The Annuitant Reserve: The portion credited to the Annuity Reserve will be distributed to annuitants (retirement, WRS disability and beneficiary) in the form of a higher fixed dividend retroactive to the May 1, 2000 check. The $4 billion TAA transfer will provide a 9.6% dividend over and above the 7.5% fixed annuitant dividend granted in 2000. In other words, the final fixed dividend rate in 2000 is 17.1%.

The dividend based on the funds transferred from the TAA will be granted as a special fixed dividend increase, rather than as a part of the normal fixed dividend. This is significant for annuitants whose annuities began in 1999. By law the fixed dividend granted in the first year after a participant retires is prorated, based on the number of full months that the participant was retired during that year. However, while the normal fixed dividend in 2000 was prorated for participants who retired during 1999, the special fixed dividend based on the funds transferred from the TAA will not be prorated. Consequently, all annuities with annuity begin dates before 2000 will receive the full 9.6% special fixed dividend based on the funds transferred from the TAA.

The retroactive increase to the May 1, 2000 fixed dividend will be paid in the July 1, 2001 annuity payments. The changes in Act 11 will also have the effect of increasing the annual fixed dividend in 2001 by .6%, from 5.1% to 5.7%. The additional .6% will be prorated for annuities that began in 2001. The supplement to the 2001 annual fixed dividend will be paid in the August 1, 2001 annuity payments, retroactive to the May 1, 2001 payment.

Creation of Market Recognition Account: Act 11 eliminates the Transaction Amortization Account (TAA) over a five-year period and creates a Market Recognition Account (MRA). Twenty percent of the TAA balance as valued at the end of 1999 (after the $4 billion transfer) would be paid out each year over a five-year period, and investment gains/losses after 1999 would be credited instead to the new MRA. The MRA would become the new accounting mechanism that would smooth the fixed investment trust earnings over a five-year period, replacing the TAA. The change to the MRA would mean a faster recognition of gains and losses than occurs with the current TAA.

The phase-out of the TAA over the five-year period will affect the fixed effective rate interest credits to active and eligible inactive members, and the fixed dividends for annuitants for the next five years.

Formula Multiplier Increase of .165%: To be eligible for the higher formula multipliers for service performed before 2000, a participant must be actively employed under the WRS after 1999. A participant who is on an official leave of absence is considered to be actively employed.

Your formula retirement benefit is based on your years of creditable service, your three highest years of earnings, a formula multiplier and any applicable actuarial reduction for early retirement. The formula multiplier factor for creditable service performed before 2000 would increase by .165%. The formula multiplier remains at the current levels for WRS creditable service performed after 1999.

For participants whose WRS termination date is after 1999 that receive a WRS disability annuity, the disability benefit based on any actual and assumed service calculated through December 31, 1999 will use the new formula multipliers provided under Act 11.

Impact on Military Service Credit: The new formula multiplier for pre-2000 service applies to the years of creditable military service to which you would be entitled based on your years of creditable service performed before 2000.

Example: A participant has four years of active military service. As of January 1, 2000, the participant has accrued 19.00 years of WRS creditable service, which entitles him to three years of military service credit. The participant works another year and terminates on January 1, 2001 with 20.00 years of creditable service, which entitles him to four years of military service credit under Wis. Stat. s. 40.02 (15) (c).

The new formula multipliers apply to the 19.00 years of WRS service performed before January 1, 2000, plus to the three years of military service to which he is entitled based on the WRS service earned before that date. The current formula multiplier would apply to the 1.00 year of WRS service performed after 1999, and to the 1.00 year of military service credit to which the participant becomes entitled based on WRS service earned after that date.

Impact on Purchased Creditable Service:

Forfeited Service - If a participant buys WRS creditable service that was originally forfeited by taking a separation benefit before 2000, the higher formula multiplier is applied to the repurchased service. However, if the service is forfeited after 1999, the pre-Act 11 formula multipliers apply to the repurchased service. The date the forfeited service is purchased has no effect on the formula multipliers that apply to the repurchased service.

Other Governmental Service -The new formula multiplier applies to any purchased Other Governmental Service that was actually performed before January 1, 2000, and the lower formula multiplier applies to any purchased service performed after that date. If a participant buys a period of Other Governmental Service of which a portion was performed before January 1, 2000, and another portion was performed after that date, different formula multipliers apply to the two portions. Since the cost of buying Other Governmental Service is an amount calculated to be the full actuarial value of the benefit increase that the service will provide, the cost would be higher for the years of service performed before 2000.

Other purchased service -The new formula multipliers apply to all other types of purchased service (e.g. Qualifying Service, uncredited junior teaching, etc.) that was originally performed before 2000.

Maximum Formula Benefit Limit Increases for Some Employment Categories:Participants must be actively employed under the WRS after 1999 to have the higher maximum apply to their formula retirement benefits. A participant who is on an official leave of absence is considered to be actively employed.

Act 11 increases the maximum formula benefit limit from 65% to 70% of final average earnings for all employment categories except the protective categories. The maximum formula benefit remains at 65% of final average earnings for protective category employees covered under Social Security, and at 85% for protective employees not covered under Social Security (firefighters).

Five Percent Fixed Interest Cap Eliminated: A participant who was subject to the five percent interest cap (and the three percent interest cap on separation benefit balances) must be an active WRS participating employee on or after December 30, 1999, to be eligible for full effective fixed interest crediting.

The five percent cap on the fixed interest credited to the required contribution balances of participants who first became employed under the WRS after January 1, 1982, is prospectively eliminated. Beginning with the interest credited on December 31, 1999, all eligible participants will receive the annual fixed effective rate interest credited to their accounts. The three percent cap on fixed investment earnings for separation benefits is also eliminated, so effective rate interest also applies to separation benefit balances.

The elimination of the fixed interest caps affects all benefits that are based on a participant's account balances. This will affect the values of separation benefits, death benefits and money purchase retirement benefits.

Separation Benefits: The Separation Benefit balance will increase for participants who have been restricted to 3% interest crediting on their separation benefits. The Separation Benefit balances for participants who are active on or after December 30, 1999 will be adjusted to the balance that would exist if they had received 5% interest on their Separation Benefit balance, rather than the 3% with which they were initially credited

The fixed effective rate of interest for 1999 will be credited to that new "5%" Separation Benefit balance, rather than to the "3%" Separation Benefit balance shown on the annual Statements of Benefits. In other words, once Act 11 is implemented, the Separation Benefit balance will be equal to the Employee Required Contribution balance portion of their Money Purchase balance (plus any voluntary additional contributions in the account plus interest).

Death Benefits Increase: A participant must die as an active WRS employee on or after December 30, 1999 for the higher death benefits to be payable.

The death benefit of participants who die as active WRS employees before reaching minimum retirement age is increased to an amount equal to the participant's money purchase balance (the employee required contribution balance plus a matching amount of employer contributions), plus any voluntary additional contributions in the employee's account. Minimum retirement age is age 55 for most participants, and age 50 for protective category employees.

Act 11 also eliminated the restriction that the beneficiary be a spouse or dependent child(ren) (or a trust in which a spouse or dependent child has a beneficial interest) to qualify for the special death benefit payable when a participant dies as an active WRS employee after reaching minimum retirement age. However, the beneficiary must be a natural living person (or a trust in which a living person has a beneficial interest) to qualify for the special death benefit; the beneficiary cannot be the estate or any entity other than one or more living persons (or a trust in which at least one living person has a beneficial interest).

Reopening the Variable Trust to New Enrollments: To be eligible to elect to participate in the Variable Trust, a participant must be an active WRS employee after 2000. A participant who is on an official leave of absence is considered to be actively employed.

The Variable Trust has been reopened for active employees. Participants can elect to have fifty percent of their future required and additional contributions deposited in the Variable Trust. Act 11 also allows former variable participants who have cancelled their original variable participation to re-enroll. Under the variable enrollment provisions of Act 11, participants cannot transfer past contributions into the Variable Trust; the election applies only to new contributions.

Legislative Service Purchase: Act 11 provided approximately a six-month window during which actively employed participants who have uncredited service as a member or employee of the Legislature, or as the employee of a legislative service agency, to purchase that uncredited service. The window during which eligible participants could have purchased this service ended on July 1, 2000.

TAA Transfer Increases Fixed Dividend: The portion of the funds credited from the TAA to the annuity reserve provides a higher fixed annuitant dividend. In addition to the original fixed dividend that was effective with the payments issued on May 1, 2000, the $4 billion TAA transfer provides an additional 9.6% fixed dividend. Since the fixed annuitant dividend in 2000 was 7.5% without this TAA transfer, it is 17.1% with the TAA transfer. However, fixed dividends in subsequent years will be smaller due to the early distribution of TAA funds retroactive to the year 2000 dividend.

Normally, per Wisconsin Administrative Code the full fixed dividend granted in the first year after a participant retires is prorated, based on the number of full months that the participant was retired during that year. For example, a participant whose annuity began on June 15, 1999 would receive six-twelfths of the fixed dividend granted in 2000, since the annuity was in force for six full months of the year.

However, on December 10, 1999 the ETF Board meeting the Board approved an emergency rule that created an exception for the portion of the dividend granted in 2000 that is based on the funds transferred from the TAA. While the normal fixed dividend in 2000 was prorated for participants who retired during 1999, the full amount of the special dividend based on the funds transferred from the TAA will not be prorated. All annuities that began before 2000, including those that began in 1999, will receive the full 9.6% dividend based on the funds transferred from the TAA.

Example: The original fixed dividend in 2000 was 7.5%, and the special dividend based on a $4 billion TAA transfer is 9.6%, an annuitant who retired on June 15, 1999 would receive six-twelfths of the normal dividend (3.8%) plus the full special dividend of 9.6%, for a total fixed dividend of 13.4%.

Returning to Work and the New Formula Multipliers: A participant receiving a WRS annuity who returns to work for any WRS employer can elect to become a covered WRS employee and have his/her annuity terminated. When the rehired annuitant "re-retires", a new annuity is calculated based on both the old and new creditable service. However, the new formula multipliers under Act 11 will apply only to the creditable service performed before 2000 that the participant earned after returning to work. The current formula multipliers would apply to the participant's creditable service performed before 2000 that was used to calculate the original annuity.

Exception: If the rehired annuitant works for at least three full continuous annual earning periods (fiscal years for teachers, judges and educational support personnel, and calendar years for all other employment categories), then "re-retires" after 1999, the higher formula multipliers under Act 11 will be applied to a number of the pre-2000 years of service earned before the original retirement date that matches the number of years the participant has accrued since returning to covered WRS employment. The higher multiplier also applies to the years of service earned after returning to work that were performed before 2000.

Example: A general category participant retired in 1995 with 18 years of creditable service. On January 1, 1997 he returned to work for a WRS employer, and elected to become covered under the WRS and have his annuity terminated. He works full-time until "re-retiring" on June 30, 2000, earning a total of 3.5 years of creditable service after returning to work. Of these 3.5 new years of service, 3.00 years were performed before 2000, and .5 year was performed after that date.

Since he has been employed for at least three continuous annual earnings periods, he is entitled to have his benefit calculated under the laws in effect on his new retirement date for a "matching" number of years that he has earned since returning to work. As of the new annuity effective date, the participant has a total of 21.5 years of WRS service.

The applicable formula multipliers for the 21.5 years of service are applied as follows:

Participants who terminated covered WRS employment before the effective date of a provision in Act 11 are not eligible for the benefits of that provision. However, as long as an inactive participant does not close his/her account by taking a lump sum benefit, upon returning to covered WRS employment the participant would prospectively be eligible for the provisions of Act 11.

Interest Crediting Limit: A participant who is subject to the current five percent interest cap (and may also be subject to the three percent cap on fixed interest for separation benefit balances), and who terminated WRS employment before December 30, 1999, continues to be subject to the interest caps. However, an inactive participant who was restricted to the interest cap(s) but returns to WRS employment after 1999 would be eligible for the effective interest rates for future annual interest credited to his/her account after the date of return to covered WRS employment.

Separation Benefits: For inactive participants who return to covered WRS employment on or after December 30, 1999, and subsequently take a separation benefit, once the participant has returned to covered employment the Separation Benefit balance will be adjusted to the balance that would exist if they had received 5% interest on their Separation Benefit balance, rather than the 3% with which they were credited.

The fixed annual interest credited to their accounts after returning to covered employment will be credited to the new "5%" Separation Benefit balance, rather than to the "3%" Separation Benefit balance shown on the annual Statement of Benefits. In other words, once they have returned to covered WRS employment, their Separation Benefit balances will be equal to the Employee Required Contribution balance portion of their Money Purchase balance (plus any voluntary additional contributions in the account plus interest).

Formula Multiplier Increase of .165%: A participant who terminated employment before 2000 would not have the new formula multipliers under Act 11 applied to creditable service performed before that date.

However, if the inactive participant returns to WRS employment and terminates employment on or after January 1, 2000, when that participant takes a retirement benefit the new formula multipliers under Act 11 would apply to the creditable service performed before 2000.

Most participants are eligible to elect participation in the variable program*. If you have never participated in the variable program, or you previously participated in the variable program but canceled your variable participation before 1999, you can file an election to participate in the variable program.

Most variable elections become effective on the January 1 after they are received by the Department. Exception: if you are a new WRS participant and we receive your variable election no later than 30 days after the date on which you became covered under the WRS, your variable election is effective on the date your WRS coverage began.

A variable election applies only to new contributions made after the date your variable election becomes effective. No monies in your existing account balance are transferred to the variable und. Once your variable election becomes effective, 50% of all new contributions to your account are deposited in the variable fund, including service purchase payments and any voluntary additional contributions made to your account.

Alternate payees: By law, "alternate payees" (the former spouses of WRS participants who receive a portion of the participant's WRS account through a Qualified Domestic Relations Order) are deemed to be inactive participants as of the "decree date". ( The decree date is defined by law as the first of the month in which the marriage is legally terminated.) Consequently, alternate payees whose decree dates are before the effective dates of the provisions in Act 11 are not eligible for those provisions.

Actuarial Assumptions Changed: The current assumed investment earnings rate of the trust f und for actuarial purposes is 8%. Another current actuarial assumption is that the salaries of the combined WRS covered population will increase by 4.8% annually. Act 11 reduces the aggregate salary increase assumption from 4.8% to 4.6%, thereby increasing the spread between these two assumptions. This has the effect of temporarily reducing annual contribution rates below what they otherwise would be.

Recalculation of Unfunded Accrued Actuarial Liabilities (UAAL): Act 11 authorizes the Employee Trust Funds Board to adjust employer UAAL balances to reflect changes in actuarial assumptions. The overall effect will be to reduce employer contribution rates, at least temporarily after Act 11 is implemented.