Civil War In Wisconsin?

In my last post I described the vicious political battle now being fought in Wisconsin over the recall election of Gov. Scott Walker. Unfortunately, this political battle has spawned internecine warfare reminiscent of the Civil War which pitted brother against brother.

As you may recall, a night or so ago my sister put a bumper sticker on her car advocating Scott Walker's reelection. The next morning she awoke to find a nail driven into her tire. Well, word of my sister's plight reached my brother, who also lives in Wisconsin. He's a retired public school teacher, a former member of the largest public teacher's union in the state and an unabashed opponent of Scott Walker. He quickly fired off an email to my sister and it was game on!

My brother's first salvo was a suggestion that the nail in my sister's tire was a false flag attack by Walker's own supporters. Apparently, that sort of thing is going on in the state as each side seeks to discredit the other in the eyes of Wisconsin's undecided voters.

Frankly, I think my brother's suggestion is a bit farfetched. While false flag attacks are possible, it's obvious they are not the norm. It's highly improbable a Walker supporter vandalized my sister's tire. Heck, if you want to believe otherwise, then you might as well believe that my sister drove a nail into her own tire. My brother's second salvo is the one I want to comment on and analyze.

You see, in her initial email to family my sister charged that Wisconsin taxpayers funded public school teachers' pensions. Well, that was like waving a red flag in front of my brother. He would have none of it. He contended that the Wisconsin Retirement System (WRS) -- the state's public employee pension system -- is funded 100% by the employees themselves, He said the WRS receives not a single dime from Wisconsin taxpayers.

I found this contention a bit shocking. My brother is no dummy. He's an expert stock investor and is normally a clear thinker. He understands economics. Yet, I felt his argument flew into the face of everything I know about the WRS, not to mention my instincts about such state-run pension plans.So I did some research.

I started with an article my brother encouraged my sister to read: The Wisconsin Lie Exposed - Taxpayers Actually Contribute Nothing To Public Employee. Forbes published the article in February of 2011. Sure enough, the author of the article, Rick Ungar, says employees fund the WRS 100%:

If the Wisconsin governor and state legislature were to be honest, they would correctly frame this issue. They are not, in fact, asking state employees to make a larger contribution to their pension and benefits programs as that would not be possible- the employees are already paying 100% of the contributions.

Wow. Forbes! It's got to be true, right?

Not necessarily. Ungar's article is based on another article written by one David Cay Johnston, a real heavy hitter, Pulitzer Prize winner, ex-New York Times reporter and "one of the country's most important journalists." Well, I read Johnston's article, "Really Bad Reporting in Wisconsin: Who 'Contributes' to Public Workers' Pensions?" also published in February of 2011, at Tax.com, which may or may not be Johnston's website.

I found the tone of Johnston's article arrogant and condescending, but that's neither here nor there. The crux of Johnston's argument is summed up in the following paragraph from his article:

The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact. 

The problem is that this "indisputable fact" is also untrue. It turns out that the State of Wisconsin does not negotiate a "total compensation" package with state workers which the workers, then, "divvy up" after the fact as they see fit. In fact, the state and public employee unions negotiate a contract that is very specific about which dollars go where. In fact, Wisconsin state law mandates specifically how the WRS will be funded and how the funds will be divvied up.

In an article on JS Online, the website of the Milwaukee Journal Sentinel newspaper, Patrick McIlheran, names the relevant state statutes and explains their consequences. He also links a report from the Wisconsin Legislative Fiscal Bureau that describes WRS finances in detail. I followed the links and continued my research. What I found directly contradicts Pulitzer Prize Winner Johnston's analysis.

According to this report the WRS provides specific benefits to individual retirees. State law stipulates that these benefits must be paid for by employer and employee contributions, which the WRS invests. State statutes also stipulate that if these funds fall short for any reason (for example, if the WRS fund managers invest the funds badly), Wisconsin taxpayers must make up the difference. In essence, the WRS is a government-operated trust fund backstopped, as all public trust funds are, by the taxpayer.

The good news is that the WRS, unlike the federal Social Security Trust Fund, contains real assets that are relatively well-managed. So the probability the state will have to step in to rescue the WRS is slim. However, backstopping is by no means the full extent of taxpayer financial involvement in the WRS.

The truth is WRS leans heavily on the infrastructure of state government administrative services (like the Legislative Fiscal Bureau) which are, obviously, paid for by taxpayers. These in kind services allow the WRS to operate more cheaply than comparable investment services in the private economy.

Pulitzer Prize Winner Johnston claims the state-run WRS operates more cheaply because state investment managers pool resources of all WRS members and realize economies of scale:

The concept, at its most basic, is buying wholesale instead of retail. Wholesale is cheaper for the buyers. That is, it saves taxpayers money.

I think it's obvious that economies of scale are available to huge, private market investment houses as well as state-run agencies. Nevertheless, that last sentence about saving the taxpayers money is an irrelevant, statist afterthought since, if state employees managed their own retirement funds in the private market, taxpayers would have no liability or related expenses whatsoever. Which begs another interesting question...

If, as Johnston claims, "all of the money going into these plans [i.e., the Retirement System] belongs to the workers," could state workers take their funds out of the WRS and invest them elsewhere, i.e., in a private equity firm? The obvious answer is no. As I stated above, state law mandates the funds be invested in the WRS. Moreover, state employees would have to be crazy to move "their" money out of WRS because they know full well that the state not only backstops the WRS but also contributes 99% of the funds to the system!

How can I say this with confidence? Because I read the state statutes and studied the report, referenced above, from the Legislative Fiscal Bureau. Here's how it works.

Wisconsin state law mandates that employees must fund the WRS with contributions amounting to 5% of their wages. The statutes say that state taxpayers must then match that amount with a 5% contribution of their own. But if this is true, how can Pulitzer Prize Winner Johnston possibly claim the contributions to WRS come 100% from employees?

In a word, sophistry.

You see, Johnston is a big picture kind of guy, not one to be bogged down in the nitty gritty details of process. His reasoning is a strange endgame kind of fuzzy logic reminiscent of Keynes famous dictum that "in the long run we are all dead." Johnston conflates economics and accounting, values and bookkeeping. He's like a football commentator who believes that his post-game analysis has more to do with deciding winners and losers than the playing of the game.

Johnston admits the state of Wisconsin, as employer, contributes a matching amount of 5% to the WRS. But this is merely a technicality, according to Johnston. That 5% the state contributes is part of the "total compensation" package the employees have already negotiated for and won. Therefore, the funds all come out of the same pocket, so to speak -- the employees' pocket, not the taxpayers'.

But wait. The sophistry gets worse.

Some years ago public employee union negotiators persuaded the state to "pickup" the 5% that the employees are supposed to contribute to the WRS! This fact alone would seem to pretty much destroy Pulitzer Prize Winner Johnston's argument that the employees contribute all the funds to the System, don't you think? Not in Johnston's warped way of looking at things. Thankfully, reality is found in the governing state statutes, not in Johnston's specious logic.

The following are the "real" facts as stated by the Legislative Fiscal Bureau report:

Impact of Employer "Pickup" of Employee-Required Contributions. Table 28 shows who actually pays the employee-and employer required contribution amounts. The amount shown as paid by employees is the aggregate amount paid by all employee classifications. WRS employers have actually assumed the payment of virtually all employee-required contributions in addition to their employer-required contribution amounts.

Table 28 indicates that the percentage of employee and employer-paid contributions has remained quite stable in recent years and reflects the fact that WRS employers generally pickup the employee-required share of WRS contributions.

Table 28, (Page 48), by the way, shows that "employers," i.e., Wisconsin taxpayers, contribute over 99% of the funds held by the WRS.

The bottom line is that in the WRS even the employee's contribution to the pension system is contributed by Wisconsin taxpayers!

This is what Scott Walker has changed. This is why public labor unions and their members are up in arms. This is what my brother either doesn't understand or is willingly to overlook for his own benefit.

(Sorry, Bro, I have to call 'em like a see 'em.)