Department of Employee Trust Funds - Hot Topic
May 8, 2003

How Financially Sound is the WRS?

The Wisconsin Retirement System (WRS) remains in sound financial condition despite the impact of a historic three year market decline and unfunded benefit improvements enacted under 1999 Wis. Act 11.

The WRS ended 1999 with assets, at market value, of $63 billion. Based on benefit promises of $51.5 billion, WRS assets equaled 122.3% of liabilities. This balance provided a significant cushion against potential future market losses.

1999 Wisconsin Act 11 increased the liabilities of the system by approximately $5.5 to $6.0 billion without a plan for any corresponding increase to the assets. As a result, the funding ratio immediately dropped to roughly 110%.

By the end of 2002, rather than continuing to grow as assumed, the assets of the WRS had declined as a result of lower than expected investment returns by over $12 billion to $50.9 billion. Meanwhile, the system's liabilities had continued to grow to $60.5 billion. This represents a funding ratio of only 84.1%.

The first step in improving the finances of the system is the annual review of contribution rates. The actuary is currently conducting an actuarial valuation of the WRS in order to set contribution rates for 2004. The actuary will not attempt to recover all of our investment losses through the next year's contributions. Instead, he will consider what contribution increases will be needed over the next thirteen years to fully fund our benefit commitments. A modest increase in the contribution rate now can compound to a significant improvement in funded status over a period of years.

In future years, the actuary will repeat the valuation and contribution rate-setting process. If investment income continues to trail assumptions, the actuary will continue to increase contribution rates annually to a level that will fully fund all benefit commitments over a reasonable period of time. Actuarial projections suggest that in the absence of future investment gains, contribution rates may have to rise by as much as 3% to 5% in the next five years. If favorable investment markets produce gains that can offset past investment losses, further contribution rate increases may be minimized or totally avoided. (It should be noted that contribution rates declined significantly during the 1990s as a result of significant investment gains)

The WRS annual review of contribution rates provides an ongoing mechanism for monitoring and adjusting the financial condition of the system. The long-term perspective used by the actuary allows financial goals to be achieved over time through gradual incremental adjustments to assumptions and funding.

In summary, while the WRS is currently underfunded, there is no threat to our ability to continue paying benefits. During 2002 we paid out approximately $2.6 billion in benefit payments. Our existing assets ensure that we can continue to pay benefits many, many years into the future. While the recent market decline is cause for caution and some concern, it is not indicative of a system in dire financial shape nor at risk of being unable to pay benefits. It is precisely because experience has shown that there are extended periods of both favorable and unfavorable investment conditions that the actuary uses a very long-term investment earnings assumption of 8% per year. The Wisconsin Retirement System continues to be in sound financial shape and able to fulfill all its commitments to members.