Vol. 16, No. 7
April 16, 1999
Bulletin Includes the 1998 WRS Annual Reconciliation Reports,
Contribution Statement and Unfunded Accrued Actuarial Liability
Your final reports of transactions and contributions as part of
the 1998 Annual Reconciliation process are included with this Bulletin.
The Department of Employe Trust Funds (ETF) has completed 1998 Annual
Reconciliation. In addition to reconciliation materials, you also
will find your 1998 Employer Annual Contribution Statement
and an explanation of Unfunded Accrued Actuarial Liability (UAAL),
also known as Prior Service Liability.
It is essential that you review your transaction/contribution material
carefully to ensure the accuracy of each employe's 1998 account
balance. Please direct questions and any necessary corrections concerning
your reconciliation reports to Rick Parpart at (608) 267-2198.
Please forward this material as soon as possible to the individual
in your office who is responsible for processing contribution reports.
QUESTIONS AND ANSWERS RELATED TO UNFUNDED ACCRUED ACTUARIAL
What is Unfunded Accrued Actuarial Liability (UAAL), also
known as Prior Service Liability?
Prior Service Liability is the cost of providing benefits for service
prior to an employer joining the WRS, or
for providing benefit improvements based on service credit
earned prior to the effective date of certain major benefit
legislative changes, several of which have been enacted into
law by the Legislature/Governor over time.
Your current balance is the net of:
the original amounts determined for your employes' service
prior to the time you came under the retirement system, plus
the liability for statutory benefit changes, plus
all interest that has been assessed on the liability, less
all payments made.
How do employers make payments on prior service liability?
Your monthly retirement contribution rate includes a small component
for prior service liability (about one to two percent for most employers).
Each month as you make retirement contributions, you are also making
a payment for your prior service liability.
Your prior service contribution percentage rate is fixed at a level
that is projected to be adequate to fully pay off the liability
over the 40-year amortization period.
To minimize future interest charges, you have the option of paying
off your liability faster. You can pay off the entire liability
in a single payment, or simply make larger-than-required payments
each year. If you are interested in paying off your liability early,
ETF will develop a customized payment plan for you.
How is interest assessed on prior service liability?
Interest is assessed at the "assumed" long-term retirement investments
earnings rate on the outstanding balance of the liability at the
end of each calendar year. The assumed rate applied to each employer's
prior service outstanding balance is 8.0 percent.
The interest that is charged on our prior service liability
each year is greater than the payments we are making. How are we
ever going to pay off our liability?
The prior service contribution rates are based on a level percentage
of payroll over the entire 40-year amortization period. This means
that the contribution rate will remain constant, but the actual
contributions will increase each year as the salaries of covered
During the early years, the salary base used to calculate contributions
is low, and the contributions are less than the interest charges.
Each year as covered wages increase, the contributions also grow
until, in approximately the 20th year, the contributions and interest
assessment will be equal. The contributions begin to reduce the
liability until the end of 40 years, when the liability has been
The actuarial assumption of 4.8% annual salary growth is used.
I heard that my UAAL balance was going to be reduced. What's
happening with that?
On December 15, 1997, the Employe Trust Funds Board accepted their
consulting actuary's recommendations for updates to the system's
actuarial assumptions, including a reduction in the future wage
growth rate from 5.3% to 4.8 percent. The actuary also recommended
that the balance be reduced by approximately 20% in recognition
of the lower wage growth assumption.
The Board initially accepted the actuary's recommendation to adjust
the UAAL balance, but subsequently tabled the recommendation until
they could get clarification of their legal authority to make adjustments
to the UAAL.
On January 15, 1999 the Attorney General's Office advised that
the Board did not have the authority to make this adjustment to
the UAAL. Acting on this advice, the Board rescinded the proposed
UAAL adjustment on February 15, 1999.
Does this mean my UAAL balance will never be adjusted?
Although the Board has resolved the questions related to the proposed
actuarial adjustment to the UAAL, this does not mean that the UAAL
balance is not subject to future adjustments. The Board will be
considering whether actuarial reductions to the UAAL implemented
in 1990, 1992 and 1994 should be reversed for consistency with the
current interpretation of the Board's authority. If the Board takes
such an action, it would result in an increase to your UAAL balance,
even if you have paid the full amount due.
It is also possible that the legislature may act to give the Board
the authority to apply actuarial adjustments to the UAAL balance.
If such authority were proposed, the Department would ask that the
Board be allowed to apply the authority in a way which would be
fair to employers who had chosen to prepay all or a portion of their
Finally, it is possible that future legislation providing early
retirement opportunities or improved retirement benefits would be
partially funded through an increase in prior service liabilities.
Such an action would increase your balance -- even if you have paid
off your entire UAAL balance.
What happens if after 40 years we have not fully paid off
Under current law, any liabilities remaining at the end of the
40-year amortization period will continue to be payable. Payments
will continue on a monthly basis until full payment has been made.
However, it is probable that before the end of 40 years the Legislature
will pass new laws that will have an impact on prior service liability,
contribution rates, and the amortization period.
Many of the employes granted prior service when we joined
the Wisconsin Retirement System (WRS) have since terminated. Why
do we still have a prior service liability?
Once you agreed to fund prior service coverage for your employes,
the granting of that service is irrevocable. The service remains
available to those employes for calculating a retirement benefit,
regardless of whether they continue in your employ, or move on to
Since the WRS remains liable to the participant for benefits based
on having granted prior service, the employer who authorized the
granting of prior service remains liable to the WRS for the cost
of granting that service.
Can an employer pay off the balance of their prior service
liability at any time?
Yes, an employer may pay off the entire balance of their prior
service liability in a lump sum payment. The Department of Employe
Trust Funds (ETF) can also provide a customized amortization schedule
so the employer can pay down the prior service liability balance
faster to reduce interest charges.
Why are employers charged 8% interest on the unpaid balance
when prevailing interest rates are lower?
The interest rate charged on the unpaid prior service balance is
based on the assumed rate of investment return for the assets in
the Wisconsin Retirement System (WRS). The WRS cannot charge an
interest rate that is less than what it expected to earn had the
entire prior service liability been paid off immediately. To do
so would not only violate the fiduciary requirements of the trust,
but would result in higher liabilities to the system as a whole.
If an employer pays off its prior service liability will
it ever have another prior service liability assessed?
If the Legislature enacts new benefit changes that result in an
unfunded prior service liability, that liability will be assessed
to all employers, including those who have paid off their previous
prior service liability.
NOTE: The Legislature's Retirement Research Committee
may be reviewing the current method for funding prior service liability
during the 1999-2001 Legislative session.
Please direct questions concerning your prior service liability
to Nancy Kittleson at (608) 267-9034.