LRB-3274/4
RAC:wlj:jf
1999 - 2000 LEGISLATURE
October 1, 1999 - Introduced by Representative Skindrud, cosponsored by Senator
Wirch. Referred to Joint survey committee on Retirement Systems.
AB495,1,11
1An Act to repeal 25.17 (14) (f);
to amend 25.18 (1) (a), 25.18 (1) (m), 40.02 (6),
240.02 (7), 40.04 (3) (intro.), 40.04 (3) (a), 40.04 (3) (d), 40.04 (4) (a) 2., 40.04 (4)
3(a) 2m., 40.04 (7) (a) (intro.), 40.23 (2m) (b), 40.23 (2m) (e) 1., 40.23 (2m) (e) 2.,
440.23 (2m) (e) 3., 40.23 (2m) (e) 4., 40.26 (2) (b), 40.26 (5) (c), 40.73 (1) (a) (intro.)
5and 40.73 (1) (c); and
to create 40.04 (3) (ab), 40.04 (3) (am), 40.04 (4) (a) 2g.,
640.05 (2) (cm), 40.23 (2m) (em) and 40.73 (1) (am) of the statutes;
relating to:
7benefit improvements, interest crediting, variable annuity option, contribution
8credits for employers, death benefits, credit for legislative service, recognition
9of income and capital gains and losses in the fixed retirement investment trust
10and affecting certain actuarial assumptions and liabilities under the Wisconsin
11retirement system.
Analysis by the Legislative Reference Bureau
This bill makes numerous changes to benefits provided under the Wisconsin
retirement system (WRS) and to the financial structure of the WRS. The changes
are as follows:
Benefit improvements under the WRS
Under current law, when a participant in the WRS terminates covered
employment and becomes eligible for a retirement annuity, one of the ways in which
the amount of his or her annuity is determined is by multiplying the participant's
final average earnings by the participant's years of creditable service and by a
percentage multiplier. For a protective occupation participant who is covered by
social security, an elected official and an executive participating employe, the
percentage multiplier is 2%. For a protective occupation participant who is not
covered by social security, the percentage multiplier is 2.5%. For all other
participants in the WRS, the percentage multiplier is 1.6%.
This bill increases the percentage multiplier for all classes of participants in the
WRS for creditable service that is performed before January 1, 2000. For a protective
occupation participant who is covered by social security, an elected official and an
executive participating employe, the percentage multiplier is increased to 2.165%.
For a protective occupation participant who is not covered by social security, the
percentage multiplier is increased to 2.665%. For all other participants in the WRS,
the percentage multiplier is increased to 1.765%. The increase in the percentage
multiplier first applies to the calculation of retirement benefits for individuals who
are participating employes in the WRS on January 1, 2000. For all creditable service
that is performed on or after January 1, 2000, however, the bill provides that the
current law percentage multipliers will apply.
Variable annuities
Under current law, assets in the variable retirement investment trust of the
public employe trust fund are almost entirely invested in equities, while about 58%
of the assets in the fixed retirement investment trust (FRIT) are invested in equities.
Participating employes in the WRS who elect to have part of their employe required
contributions segregated for a variable annuity have these contributions deposited
into the variable retirement investment trust, while all other participating employes
in the WRS who have all or part of their required contributions segregated for a fixed
annuity have these contributions deposited into the FRIT.
Under current law, employe contribution accumulations in the variable
retirement investment trust are credited annually with interest at the effective rate,
which is essentially the actual rate of return on the assets, after all expenses are
deducted. In contrast, contribution accumulations in the FRIT are credited with
interest at the effective rate only for those participating employes who were
participating employes before January 1, 1982. In contrast, participating employes
who began WRS covered employment on or after January 1, 1982, have their
contribution accumulations in the FRIT credited with interest at the assumed
benefit rate, which is a rate of 5%.
Under current law, eligibility to participate in the variable annuity program is
closed to all participants except to those who elected to participate in the program
before April 30, 1980. This bill permits any participant in the WRS who is a
participating employe on January 1, 2001, to participate in the variable annuity
program.
Increase in maximum amount of initial retirement annuity
Under current law, the maximum amount of an initial annuity for a participant
in the WRS who receives an annuity that is calculated using the percentage
multiplier, other than a protective occupation participant who is not covered by social
security, is an amount equal to 65% of the participant's final average earnings. This
bill increases the amount to 70% for participants who are participating employes on
the effective date of the bill.
Calculation of unfunded prior service liability balances
Under current law, for the purpose of funding retirement benefits under the
WRS, employes and employers are required to pay contributions. These
contributions are generally referred to as employe required contributions and
employer required contributions. The contribution rates are based on participating
employes' earnings and are determined annually. Under current law, the employer
must pay the employer required contributions and may pay any of the employe
required contributions on behalf of the employe. In addition, employers covered
under the WRS must pay contributions for any unfunded prior service liability that
is owed to the WRS as a result of past benefit improvements under the WRS that were
not fully funded at the time of their creation and of recognizing prior service earned
by employes before the employer became a covered employer under the WRS.
Currently, contribution rates for the payment of unfunded prior service liability
are amortized over 40 years and the unfunded prior service liability balance may not
be adjusted to reflect any change in the actuarial assumptions that are used to value
the liabilities of the WRS. Consequently, the unfunded prior service liability balance
may exceed or be less than the amount that is actuarially required to fund the
unfunded prior service incurred by employers under the WRS.
This bill authorizes DETF to adjust the unfunded prior service liability balance
of the WRS and of each employer to reflect any changes in certain assumptions used
to value the liabilities of the WRS if the actuary recommends and the employe trust
funds board approves the changes or if otherwise provided by law.
Accelerated distribution of moneys from the transaction amortization
account of the fixed retirement investment trust
Under current law, the FRIT and a variable retirement investment trust are
maintained within the public employe trust fund under the management of the
investment board. Within the FRIT, a transaction amortization account (TAA) is
maintained and used to smooth out fluctuations in unrecognized gains and losses in
the value of FRIT assets. The balance of the TAA closely parallels the difference
between market value and the adjusted book value of the assets. Annually, 20% of
the balance of the TAA is distributed to participating accounts in the fixed annuity
reserve, the fixed employer accumulation reserve and the fixed employe
accumulation reserve.
This bill provides that on December 31, 1999, $4,000,000,000 is to be
distributed from the TAA to the reserves and accounts in the FRIT in an amount
equal to a percentage of the total distribution determined by dividing each reserve's
and account's balance on the prior January 1 by the total balance of the FRIT on the
prior January 1.
Establishment of employer required contribution credits
Under the bill, $200,000,000 of the increase in the fixed employer accumulation
reserve that results from the distribution from the TAA will be used to establish
contribution credits for payments for employers that have unfunded prior service
liability under the WRS. For those employers that do not have unfunded prior
service liability, the credits will be used to make payments for their required
employer contributions under the WRS. During the period in which the credits are
used, the employers that have unfunded prior service liability will not be required
to make payments for unfunded prior service liability and those employers that do
not have unfunded prior service liability will not be required to make employer
required contributions.
Elimination of transaction amortization account and creation of market
recognition account
This bill eliminates the TAA over a five-year period and creates, in its place,
a market recognition account (MRA) that is to be used for distributing the total
market value investment return earned by the FRIT. Under the bill, on each
December 31, the following amounts are to be distributed from the MRA to each
participating account in the FRIT:
1. The expected amount of investment return in the FRIT.
2. An amount equal to 20% of the difference between the total market value
investment return earned by the FRIT and the expected amount of investment
return of the FRIT during the year ending on December 31.
3. An amount equal to 20% of the sum of the differences between the total
market value investment return earned by the FRIT and the expected amount of
investment return of the FRIT at the end of the four preceding years.
Determination of actuarial assumptions for certain purposes under the
WRS
Under current law, the "assumed rate" is the probable average effective rate
that is expected to be earned for the FRIT on a long-term basis. Currently, the
assumed rate is a rate of 8% and the actuarial assumption for across-the-board
salary increases for the purpose of valuing the liabilities of the WRS is 3.2% less than
the assumed rate unless due to changed economic circumstances the actuary
recommends and the employe trust funds board approves a different rate. The
assumed rate for a calendar year is used for all calculations of required contributions
and reserves for WRS participants and employers.
This bill increases the actuarial assumption for across-the-board salary
increases for the purpose of valuing the liabilities of the WRS from 3.2% less than
the assumed rate to 3.4% less than the assumed rate.
Interest crediting on employe required contribution accumulations
Under current law, for those participants in the WRS who are hired on or after
January 1, 1982, interest is credited annually to their employe required contribution
accumulations in the fixed annuity division of the employe trust fund at the assumed
benefit rate. The assumed benefit rate is 5%. This bill provides that interest on these
accumulations for participants who are participating employes in the WRS on the
effective date of the bill is to be credited at the effective rate. The effective rate is
essentially the interest rate earned by the accumulations, after all expenses are
deducted.
Death benefits under the WRS
Under current law, the death benefit for most participants in the WRS, other
than annuitants, equals the sum of the additional and employe required contribution
accumulations credited to the participant's account. In other words, the death benefit
does not include the employer required contribution accumulations. However, if the
participant at the time of death was a participating employe, had attained the age
of 55, or the age of 50 if he or she was a protective occupation participant, and his or
her beneficiary is a dependent, the death benefit is equal to the present value of the
life annuity that the beneficiary would have received had the participating employe
been eligible to receive an annuity and had elected to receive the annuity in the form
of a joint and survivor annuity. The valuation of such a death benefit would include
the employer required contribution accumulations.
This bill eliminates the requirement that the beneficiary be a dependent in
order to receive the death benefit that equals the present value of a life annuity in
the form of a joint and survivor annuity. Instead, the bill requires that the
beneficiary must be a natural person or a trust in which a natural person has a
beneficial interest. In addition, for a participating employe who has not attained age
55, and any protective occupation participant who has not attained age 50, the bill
increases the death benefit for such a participating employe to an amount equal to
the sum of the employe additional contribution and twice the employe required
contribution accumulations, including any interest credited to the accumulations.
Purchase of creditable service by legislators and legislative service agency
employes
This bill permits any person who is a participating employe in the WRS to
purchase creditable service under the WRS for any service not previously credited
that was performed by the person as a member or employe of the legislature or
employe of a legislative service agency.
This bill will be referred to the joint survey committee on retirement systems
for a detailed analysis, which will be printed as an appendix to this bill.
For further information see the state and local fiscal estimate, which will be
printed as an appendix to this bill.
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:
AB495, s. 1
1Section
1. 25.17 (14) (f) of the statutes is repealed.
AB495, s. 2
2Section
2. 25.18 (1) (a) of the statutes is amended to read:
AB495,6,8
125.18
(1) (a) Notwithstanding subch. IV of ch. 16 and s. 20.930, employ special
2legal or investment counsel in any matters arising out of the scope of its investment
3authority. The employment of special legal counsel shall be with the advice and
4consent of the attorney general whenever such special counsel is to be compensated
5by the board. Any expense of counsel so employed shall be borne by
the current
6income account of the fund for which the services shall be furnished
, except that the
7fixed retirement investment fund may bear this expense from its transaction
8amortization account.
AB495, s. 3
9Section
3. 25.18 (1) (m) of the statutes is amended to read:
AB495,6,1510
25.18
(1) (m) Notwithstanding subchs. IV and V of ch. 16, employ professionals,
11contractors or other agents necessary to evaluate or operate any property if a fund
12managed by the board has an interest in, or is considering purchasing or lending
13money based upon the value of, that property. Costs under this paragraph shall be
14paid by the fund and charged to the appropriate
current income account under s.
1540.04 (3).
AB495, s. 4
16Section
4. 40.02 (6) of the statutes is amended to read:
AB495,6,2217
40.02
(6) "Assumed benefit rate" means a rate of 5%. The assumed benefit rate
18shall be used for calculating reserve transfers at the time of retirement, making
19actuarial valuations of annuities in force, determining the amount of lump-sum
20death benefits payable from the portion of an annuity based on additional deposits
21and crediting interest to employe required contribution accumulations
under s.
2240.04 (4) (a) 2.
AB495, s. 5
23Section
5
. 40.02 (7) of the statutes is amended to read:
AB495,7,924
40.02
(7) "Assumed rate" means the probable average effective rate expected
25to be earned for the fixed annuity division on a long-term basis. The assumed rate
1shall be a rate of
7.5% 8% and the actuarial assumption for across-the-board salary
2increases for the purpose of valuing the liabilities of the Wisconsin retirement system
3shall be
1.9% 3.4% less than the assumed rate unless due to changed economic
4circumstances the actuary recommends and the board approves a different rate. The
5assumed rate for a calendar year shall be used for all calculations of required
6contributions and reserves for participants, except as provided in s. 40.04 (4) (a) 2.
,
72g. and 2m., and the amount of any lump sum benefit paid instead of an annuity,
8except it shall not be used for any purpose for which the assumed benefit rate is to
9be used under sub. (6).
AB495, s. 6
10Section
6. 40.04 (3) (intro.) of the statutes is amended to read:
AB495,7,2311
40.04
(3) (intro.) A fixed retirement investment trust and a variable retirement
12investment trust shall be maintained within the fund under the jurisdiction and
13management of the investment board for the purpose of managing the investments
14of the retirement reserve accounts and of any other accounts of the fund as
15determined by the board, including the accounts of separate retirement systems.
16Within the fixed retirement investment trust there shall be maintained a
17transaction amortization account and a
current income
market recognition account,
18and any other accounts as are established by the board or the investment board. A
19current income account shall be maintained in the variable retirement investment
20trust. All costs of owning, operating, protecting and acquiring property in which
21either trust has an interest shall be charged to the current income or
transaction
22amortization market recognition account of the trust having the interest in the
23property.
AB495, s. 7
24Section
7. 40.04 (3) (a) of the statutes is amended to read:
AB495,8,13
140.04
(3) (a)
All earnings, profits or losses of the fixed retirement investment
2trust and the The net gain or loss of the variable retirement investment trust shall
3be distributed annually on December 31 to each participating account in the same
4ratio as each account's average daily balance within the respective trust bears to the
5total average daily balance of all participating accounts in
that the trust.
For the
6fixed retirement investment trust the amount to be distributed shall be the then
7balance of the current income account plus 20% of the then balance of the transaction
8amortization account. For the variable retirement investment trust the The amount
9to be distributed shall be the excess of the increase within the period in the value of
10the assets of the trust resulting from income from the investments of the trust and
11from the sale or appreciation in value of any investment of the trust, over the
12decrease within the period in the value of the assets resulting from the sale or the
13depreciation in value of any investments of the trust.
AB495, s. 8
14Section
8. 40.04 (3) (ab) of the statutes is created to read:
AB495,8,2315
40.04
(3) (ab) Beginning on December 31, 2000, the balance of the transaction
16amortization account shall be determined and 20% of the balance established on
17December 31, 2000, shall be distributed annually on December 31 to each
18participating account in the same ratio as each account's average daily balance
19within the fixed retirement investment trust bears to the total average daily balance
20of all participating accounts in the trust until the balance of the transaction
21amortization account is entirely distributed. Notwithstanding sub. (3) (intro.), after
22the entire balance of the transaction amortization account has been distributed, the
23department shall close the account.