26
February
2011

Pension Packages Reduce Government Costs

I never wanted to become an expert in pensions. Thanks to now-Governor Scott Walker I had no choice. Now, many public workers in Wisconsin are getting sideways glances from their neighbors just as public workers in Milwaukee County have ever since Walker started his anti-government crusade back in 2001.

You would think from the news media that pensions greatly inflate costs to taxpayers. That is not true. In fact, if invested right, they don’t have to cost taxpayers anything. What better deal could government get? Rather than paying the larger salaries of the private sector, government could use its larger collective investment abilities to pay for the pensions entirely.

So picture this — a large pool of money, which has grown from taxpayer money, could be used so that taxpayers never have to contribute again? Sounds perfect right?

Well, not so perfect when you add politicians to the mix.

First you need to understand that pension funds are segregated funds. A local or state government cannot simply draw off of these funds to pay for ongoing expenses. Yes, if you get a whole bunch of politicians in a room and they’re talking about a fund that has done well, they’ll say it’s been under their watch and they should have access to those funds. However, and this was wise legislation that was once passed at the federal level, it is illegal to tap into those funds for anything but pensions.

So schemes have been developed to tap into those funds to lower the tax burden. Essentially these are schemes to work around existing law but still allow the government to tap funds that should not be theirs to tap.

One such scheme that backfired helped to bring Wisconsin Governor Scott Walker to power. In Milwaukee County workers agreed to take lower pay in exchange for fatter pensions. The County had the actuarial firm Mercer & Associates look at their fund and Mercer testified to their County Board that increasing the pensions for all county employees would be cost neutral. In other words, it would cost taxpayers nothing.

Now you have to understand that it sounds like candy to a politician when they hear they can solve a problem and it won’t cost anything. You can then run back to your district at election time and tell them you didn’t raise taxes. It frees them up to work on other quality of life projects.

Here’s where the personal part comes in. I was serving on the County Board at the time. The Executive sent a proposal to us to approve union contracts with lower salaries but higher pensions. He based his decision to submit this proposal based on numbers from Mercer & Associates. He then sent his people to the county board and they presented it to board members as a responsible program that would not be extremely lucrative but would be fair and could cost taxpayers nothing. He also sent his people to give presentations to the unions and they presented it as a program that would enrich county workers when it mattered the most — in their senior years.

It was two stories and the county board was never the wiser. It was a ruse on the County board but he was unaware that the big ruse was on him — Mercer never did their homework and they were telling him what he wanted to hear.

Fast forward through the drama of the next 6 months and Scott Walker rose from being an obscure State Representative known for putting out weekly press releases on everything under the sun (Opposing the Million Man March) to being the County Executive of Wisconsin’s most populated county.

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1 Comment

  1. John-david Morgan:

    It would be a good idea for all of us to become pension experts and start looking at Walker’s plans for the state of Wisconsin Investment Board (SWIB) and the $67 billion (yes, billion!) in pension assets that SWIB manages.

    Walker’s biggest Wisconsin campaign contributors happen to have been the executives at Heartland Advisors, a financial services firm in Milwaukee that ten years ago had some rather interesting dealings with both SWIB and the Securities Exchange Commission over fraudulent pricing of municipal bond funds and an alleged “sham sale of bonds” to SWIB.

    Heartland has invested some $60,000 in Walker taking the governor’s office … and it’s evidently no coincidence that there’s a lot of focus on the state worker’s pension funds.

    By the way, Jim, Deuce looks as great as ever up there on the Watchdog banner.

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