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Employer Bulletin

All Employers
Vol. 16, No. 16
November 18, 1999

Benefit Improvement Bill Proposals Summarized

The Department of Employe Trust Funds has prepared a summary of significant changes posed by Assembly Bill 495. A copy of this summary is available on our Internet site under Hot Topics at The Status and Legal Issues section at the beginning of the summary will be updated on the Internet, as new information becomes available. If you have questions please call the Employer Communication Center at (608) 264-7900 or send us an e-mail through the "Contact Us" area of our Internet site.

Assembly Bill 495 (AB495)

Status and Legal Issues

The mission of the Department of Employe Trust Funds and the Employe Trust Funds Board is to protect the integrity of the Wisconsin Retirement System (WRS) and each participant’s beneficial interest in the trust. Proposed Assembly Bill 495 (AB 495) raises a number of legal, funding and equity issues. For example, the proposal relies on "internal funding" (i.e. the change in the actuarial spread and the recognition of $4 billion from the Transaction Amortization Account (TAA) rather than new contribution dollars to pay for the benefit changes.

This approach to funding a pension bill will likely necessitate court review of its constitutionality and whether its provisions may be implemented without breaching the trustee’s fiduciary duties. Taking a deliberate and cautious approach will help protect the members of the funds. The Special Investment Performance Dividend lawsuit, which spanned ten years and ultimately resulted in the State having to pay the Trust Fund over $206 million, plus over $8 million in plaintiff attorney fees, is an example of what can happen if this course is not taken. Three years after the final court decision, the Department is still working to handle the remedial payments to annuitants and their heirs.

The Department and Board will review the available legal options. Seeking a declaratory judgement appears to be the preferred method to get court review. Like all court proceedings, this could take months or years depending on the court’s schedule and the complexity of the arguments made. The Legislature has also acknowledged the possibility of judicial review by amending AB 495 to request that the Wisconsin Supreme Court take original jurisdiction over legal issues brought before the court system. It is difficult to speculate on the impact this legislation will have on our members until legal counsel and the courts have provided guidance on the legislation.

This summary represents an initial analysis of the provisions of AB 495. The statements about how the Department of Employe Trust Funds currently interprets this proposed legislation and plans to implement it are preliminary and are not final or binding on the Department, the WRS or the Employe Trust Funds Board. The Department of Employe Trust Funds reserves the right to add to or replace any of the interpretations in this summary. These interpretations are subject to change based upon legal advice or court rulings, and if AB 495 is enacted into law, administrative rules will be promulgated to further clarify how AB 495 will be implemented.

The Department cautions each participant to first evaluate your individual retirement needs and the WRS benefits available prior to AB 495, and not to take any irrevocable action based on the assumption that AB 495 will become law and be implemented.

Assembly Bill 495 (AB 495) Summary

Transfer of Funds from the Transaction Amortization Account (TAA) and Creation of a Market Recognition Account (MRA).

TAA Transfer: On December 31, 1999, after the regular 20% annual distribution from the TAA occurs, AB 495 requires that an additional $4 billion in unrealized gains (i.e. "paper gains") be distributed from the TAA into the Trust Fund reserves. As required by law for all distributions from the TAA, the $4 billion will be credited proportionately between the reserves of the Fixed Trust Fund.

The Employe Reserve Active and Eligible Inactive Accounts: The portion of the unrealized gains transferred from the TAA to the Employe Reserve will be credited to employes in the form of a higher fixed effective interest rate credit for 1999. The Department estimates that the TAA transfer will increase the 1999 fixed effective rate by roughly 10% above the amount it would be had the $4 billion transfer not occurred. For example, if the 1999 fixed rate would be 7% without the TAA transfer, it would be a little over 17% with the TAA transfer.

Special Note to Variable Participants:Transfers from the TAA do not affect Variable Trust effective rate interest crediting. However, the higher Fixed Trust effective rate resulting from the TAA transfer could affect your "variable excess" balance. Your variable excess balance (shown on your annual Statement of Benefits) is based on a comparison of the actual total balance of your account, compared to what your total account balance would be if you had never participated in the Variable Trust. Consequently, a higher Fixed Trust effective interest rate will result in a lower variable excess balance. The variable adjustment to your formula annuity is calculated by multiplying the variable excess (or deficiency) balance in your account (including matching amounts for employer contributions) times the money purchase factor based on your age at the time your benefit begins.

Therefore, the lower your variable excess balance, the lower the amount that will be added to your monthly formula retirement benefit when you retire. However, if your retirement benefit would be higher under the money purchase calculation, since the higher fixed effective rate would increase your total money purchase account balance it would have the effect of increasing your money purchase retirement benefit. Please refer to the Calculating Your Retirement Benefit (ET-4107) and How Participation in the Variable Trust Affects Your WRS Benefits (ET-4930) brochures for more detailed information.

The Employer Reserve: Of the total amount credited to the Employer Reserve, $200 million will be used to create separate "credit balance" accounts for each WRS employer. Each employers share of the $200 million is calculated based on that employers percentage of the total covered WRS payroll in 1998. If an employer is paying a monthly contribution for their actuarial accrued unfunded liability, that contribution is deducted from that employers credit balance account until the liability is paid or the balance is exhausted.

If the employer has no remaining unfunded actuarial accrued liability to the Trust Fund, or an employers unfunded liability is paid in full before that employers credit balance is exhausted, the employers normal monthly required contributions are deducted from the credit balance account until the balance is exhausted.

The Annuity Reserve: The portion credited to the Annuity Reserve would be distributed to annuitants in the form of a higher fixed dividend on the May 1, 2000 check. The Department estimates that the TAA transfer would increase the fixed annuitant dividend by roughly an additional ten percent over the dividend that would be payable without the TAA transfer.

The increased fixed dividend resulting from the TAA crediting will be treated as any other fixed dividend, and will increase the monthly amount of the fixed portion of an annuity. Those retiring before 1999 would receive the full dividend. Those retiring in 1999 would receive a prorated dividend, based on the number of full months for which the annuity was in force during 1999. If you participate in the Variable program, AB 495 does not affect the variable portion of your annuity.

Creation of Market Recognition Account: AB 495 eliminates the Transaction Amortization Account (TAA) over a five-year period and creates a Market Recognition Account (MRA). Twenty percent of the TAA balance as valued at the end of 1999 (after the $4 billion transfer) would be paid out each year over a five-year period, and investment gains/losses after 1999 would be credited instead to the new MRA. The MRA would become the new accounting mechanism that would smooth the fixed investment trust earnings over a five-year period, replacing the TAA. The change to the MRA would mean a faster recognition of gains and losses than occurs with the current TAA.

The phase-out of the TAA over the five-year period will result in higher fixed effective rate interest credits to active and eligible inactive members, and higher fixed dividends for annuitants for the next five years (i.e. higher than these rates would have been if the TAA were not being eliminated and the MRA established).

Benefit Improvements for Active Participants (Currently Employed)

Formula Factor Increase of .165%: To be eligible for the higher formula factors for service performed before 2000, a participant must be actively employed after 1999. A participant who is on an official leave of absence is considered to be actively employed.

The formula retirement benefit is based on your years of creditable service, your three highest years of earnings and a formula factor. The formula factor for creditable service performed before 2000 would increase by .165%. The formula factor remains at the current levels for WRS creditable service performed after 1999.

Increase In
General/Teachers/Educational Support Staff 1.6% 1.765% 10.31%
Executive/Elected Official/Protective with Social Security 2.0% 2.165% 8.25%
Protective without Social Security 2.5% 2.665% 6.60%

Impact on Military Service Credit: The new formula factor for pre-2000 service would apply to the years of creditable military service to which a participant would be entitled based on the years of creditable service performed before 2000.

Example: A participant has four years of active military service. As of January 1, 2000, the participant has accrued 19.00 years of WRS creditable service, which entitles him to three years of military service credit. The participant works another year and terminates on January 1, 2001 with 20.00 years of creditable service, which entitles him to four years of military service credit under Wis. Stat. §40.02 (15) (c).

The new formula factors apply to the 19.00 years of WRS service performed before January 1, 2000, plus to the three years of military service to which he is entitled based on the WRS service earned before that date. The current formula factor would apply to the 1.00 year of WRS service performed after 1999, and to the 1.00 year of military service credit to which the participant becomes entitled based on WRS service earned after that date.

Impact on Purchased Creditable Service:

Forfeited Service If a participant buys WRS creditable service that was originally forfeited by taking a separation benefit before 2000, the higher formula factor is applied to the repurchased service. However, if the service is forfeited after 1999, the current formula factors apply to the repurchased service. The date the forfeited service is purchased has no effect on the formula factors that apply to the repurchased service.

Other Governmental Service The new formula factor applies to any purchased Other Governmental Service that was actually performed before January 1, 2000, and the lower formula factor applies to any purchased service performed after that date. If a participant buys a period of Other Governmental Service of which a portion was performed before January 1, 2000, and another portion was performed after that date, different formula factors apply to the two portions. Since the cost of buying Other Governmental Service is an amount calculated to be the full actuarial value of the benefit increase that the service will provide, the cost would be higher for the years of service performed before 2000.

Other purchased service The new formula factors would apply to all other types of purchased service (e.g. Qualifying Service, uncredited junior teaching, etc.) that was originally performed before 2000.

Maximum Formula Benefit Limit Increases for Some Employment Categories: Participants must be actively employed after 1999 to have the higher maximum apply to their formula retirement benefits. A person who is on an official leave of absence is considered to be actively employed.

AB 495 increases the maximum formula benefit limit from 65% to 70% of final average earnings for all employment categories except the protective categories. The maximum formula benefit remains at 65% of final average earnings for protective category employes covered under Social Security, and at 85% for protective employes not covered under Social Security.

Five Percent Fixed Interest Cap Eliminated: A participant who is currently subject to the five percent and three percent interest caps must terminate WRS employment on or after the effective date of AB 495 legislation to be eligible for full effective fixed interest crediting.

The current five percent cap on the fixed interest credited to the required contribution balances of participants who first became employed under the WRS after January 1, 1982, is prospectively eliminated. Beginning on December 31, 1999, all participants will receive the fixed effective rate interest credited to their accounts. The three percent cap on fixed investment earnings for separation benefits is also eliminated, so the effective rate interest will also apply to separation benefit balances.

The elimination of the fixed interest caps increases all benefits that are based on a participants account balances. This will increase the benefit values of separation benefits, death benefits and money purchase retirement benefits.

Death Benefits Increase: A participant must die as an active WRS employe on or after the effective date of AB 495 for the higher death benefits to be payable.

The death benefit of participants who die as active WRS employes before reaching minimum retirement age will increase to an amount equal to the participants money purchase balance (the employe required contribution balance plus a matching amount of employer contributions), plus any voluntary additional contributions in the employes account. Minimum retirement age is age 55 for most participants, and age 50 for protective category employes.

AB 495 also eliminates the restriction that the beneficiary be a spouse or dependent child(ren) (or a trust in which a spouse or dependent child has a beneficial interest) to qualify for the special death benefit payable when a participant dies as an active WRS employe after reaching minimum retirement age. However, the beneficiary must be a natural living person (or a trust in which a living person has a beneficial interest) to qualify for the special death benefit; the beneficiary cannot be the estate or any entity other than one or more actual persons (or a trust in which at least one living person has a beneficial interest).

Please Note: There was what appears to be an omission when AB 495 was drafted. This omission creates a situation where there would be no death benefit payable if a participant dies as an active WRS employe after reaching minimum retirement age, but does not have one or more natural living persons (or a trust in which at least one living person has a beneficial interest) as beneficiary. Legislation is pending that would eliminate this apparent omission.

Reopening the Variable Trust to New Enrollments: To be eligible to elect Variable program participation, a participant must be an active WRS employe after 2000. A participant who is on an official leave of absence is considered to be actively employed.

The Variable Trust will be reopened for active employes. Active employes can elect to have fifty percent of their future required and additional contributions deposited in the Variable Trust. AB 495 allows former variable participants who have cancelled their original variable participation to re-enroll. Participants cannot transfer past contributions into the Variable Trust; the election applies only to future contributions.

Legislative Service Purchase: AB 495 provides approximately a six-month window during which active employes who have uncredited service as a member or employe of the Legislature, or as the employe of a legislative service agency, to purchase that uncredited service. The window during which eligible participants could elect to buy this service would end on the first day of the 7th month beginning after the effective date of AB 495.

Example: If AB 495 becomes effective in November 1999, a participating employe could buy this service until June 1, 2000.

Effects of AB 495 on WRS Annuitants (Retirees)

TAA Transfer Increases Fixed Dividend: The portion of the funds credited from the TAA to the annuity reserve will provide an increase in the fixed annuitant dividend next year. It will be effective with the payments issued on May 1, 2000. The Department roughly estimates that the TAA transfer would increase the 1999 fixed dividend by more than 10% over the amount it would be without the TAA transfer. For example, if the year 2000 fixed annuitant dividend would be 5% without the TAA transfer, it would be a little over 15% with the TAA transfer. As a consequence, however, fixed dividends in subsequent years will be somewhat lower due to the early crediting of TAA funds.

By law the fixed dividend granted in the first year after a participant retires is prorated, based on the number of full months that the participant was retired during that year. For participants who retired during 1999, the fixed dividend granted in 2000 will be prorated based on the number of full months in 1999 for which their annuity was paid. No prorated fixed dividend is payable unless the prorated dividend would be at least 1%.

Example: A participant retired on May 28, 1999. That participants annuity was in force seven full months in 1999 (June through December), so the annuitant would receive seven twelfths of the fixed dividend on the May 1, 1999 annuity payment. For example, if the fixed dividend is 15% (including the portion based on the TAA transfer), that annuitants prorated fixed dividend would be 8.7%.

Returning to Work and the New Formula Factors: A participant receiving a WRS annuity who returns to work for any WRS employer can elect to become a covered WRS employe and have his/her annuity terminated. When the rehired annuitant "re-retires", a new annuity is calculated based on both the old and new creditable service. However, the new formula factors under AB 495 will apply only to the creditable service performed before 2000 that the participant earned after returning to work. The current formula factors would apply to the participants creditable service performed before 2000 that was used to calculate the original annuity.

Exception: If the rehired annuitant returns and works for at least three full continuous years (fiscal years for teachers, judges and educational support personnel, and calendar years for all other employment categories), then "re-retires" after 1999, the higher formula factors under AB 495 will be applied to a number of the pre-2000 years of service earned before the original retirement date that matches the number of years the participant has accrued since returning to covered WRS employment. The higher factor also applies to the years of service earned after returning to work that were performed before 2000.

Example: A general category participant retired in 1995 with 18 years of creditable service. On January 1, 1997 he returned to work for a WRS employer, and elected to become covered under the WRS and have his annuity terminated. He works full-time until "re-retiring" on June 30, 2000, earning a total of 3.5 years of creditable service after returning to work. Of these 3.5 new years of service, 3.00 years were performed before 2000, and .5 year was performed after that date.

Since he has been employed for at least three continuous annual earnings periods, he is entitled to have his benefit calculated under the laws in effect on his new retirement date for a "matching" number of years that he has earned since returning to work. As of the new annuity effective date, the participant has a total of 21.5 years of WRS service.

The applicable formula factors for the 21.5 years of service are applied as follows:

The current formula factor of 1.6% applies to:
14.50 yrs. WRS service from original annuity
+ .50 yr. Rehired service performed after 2000
15.00 total  
AB 495 formula factor of 1.765 applies to:
3.00 yrs. Rehired service performed before 2000
3.50 yrs. Matching original annuity’ service (matches total new service earned after returning to work)
6.50 total  

Effects of AB 495 on Inactive Participants

Participants who have terminated covered WRS employment before the effective date of a provision in AB 495 are not eligible for the benefits of that provision. However, as long as inactive participants do not close their accounts by taking a separation benefit, upon returning to covered WRS employment they would prospectively be eligible for the provisions of AB 495.

Interest Crediting Limit: A participant who is subject to the current five percent interest cap (and may also be subject to the three percent cap on fixed interest for separation benefit balances), and who has terminated WRS employment before the effective date of AB 495, continues to be subject to the interest caps. However, an inactive participant who is currently restricted to the interest cap(s) but returns to WRS employment after 1999 would be eligible for the effective interest rates for annual interest credited to their account after the date they return to covered WRS employment.

Formula Factor Increase of .165%: A participant who has terminated employment before 2000 would not have the new formula factors under AB 495 applied to creditable service performed before that date.

However, if the inactive participant returns to WRS employment and terminates employment on or after January 1, 2000, when that participant takes a retirement benefit the new formula factors under AB 495 would apply to the creditable service performed before 2000.

Variable Trust Participation: If an inactive participant who is not currently participating in the Variable Program is later employed under the WRS after 2000, that participant would be eligible to elect that fifty percent of future WRS contributions be deposited in the Variable Trust.

Alternate payees: By law, "alternate payees" (the former spouses of WRS participants who receive a portion of the participant’s WRS account through a Qualified Domestic Relations Order) are deemed to be inactive participants as of the "decree date". (The decree date is defined by law as the first of the month in which the marriage is legally terminated.) Consequently, alternate payees whose decree dates are before the effective dates of the provisions in AB 495 are not eligible for those provisions of AB 495.

Other Changes

Actuarial Assumptions Changed: The current assumed investment earnings rate of the trust fund for actuarial purposes is 8 percent. Another current actuarial assumption is that the salaries of the combined WRS covered population will increase by 4.8% annually. AB 495 reduces the aggregate salary increase assumption from 4.8% to 4.6%, thereby increasing the spread between these two assumptions. This has the effect of temporarily reducing annual contribution rates below what they otherwise would be.

Recalculation of Unfunded Accrued Actuarial Liabilities (UAAL): AB 495 authorizes the Employe Trust Funds Board to adjust employer UAAL balances to reflect changes in actuarial assumptions. The overall effect will be to reduce employer contribution rates, at least temporarily after AB 495 becomes law.


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