IPERS' financial health improves, but fund still short

Iowa's largest public employees' pension fund is $5.5 billion short of full funding, but the outlook is much brighter than a few years ago, when a consultant warned the system was headed for a financial "train wreck."

A report presented Thursday to the Iowa Public Employees' Retirement System, which has more than 340,000 members, showed the pension fund's assets have grown to $28 billion. IPERS is now 82.7 percent funded, up from 81 percent last year.

The report comes at a time when many public pension funds nationally are in trouble. A study in September by Moody's Investors Service said the nation's 25 largest public pension funds face $2 trillion in unfunded liabilities.

RELATED: IPERS' pension fund reports 15.88 percent return

Iowa taxpayers are on the hook for IPERS' $5.5 billion in unfunded liabilities. But that's down from nearly $5.8 billion last year, reported actuaries for Cavanaugh MacDonald Consulting LLC. In contrast, the funded ratio for Illinois' largest public employees' pension fund, the Teachers Retirement System, is 44 percent, ranking it among the nation's worst-funded major retirement systems.

A good year in the financial markets provided IPERS an investment gain of 15.88 percent for the 12 months ending June 30.

Donna Mueller, IPERS' chief executive officer, said Thursday's report shows that for the first time in more than a decade, the Iowa pension fund's contributions by public employees and government employers equaled the expected actuarial contribution rates.

"Key measurements show IPERS is performing exactly as intended to provide secure lifetime retirement benefits for Iowa's public employees," Mueller said. She added that the pension fund's amortization period has been reduced from 27 years to 25 years.

IPERS' members include current, former and retired employees of state agencies, school districts, cities, counties and other Iowa government agencies. The average IPERS member retires after 22 years and receives an annual pension of $16,000.

Gretchen Tegeler, president of the Taxpayers Association of Central Iowa, said she agrees that IPERS is headed in the right direction. But she also said a defined benefit pension system with $5.5 billion in unfunded liabilities is not healthy.

"It is working its way back to financial health and will become healthy if all assumptions hold and we are comfortable with asking people who have not been born yet to help pay for work that was performed last year," Tegeler said.

Tegeler also said the average of $16,000 in annual IPERS payouts includes people who retired many years ago and some who didn't stay long. The average IPERS member with 30 to 34 years of service today earns $63,165 annually, she said. That person would receive about $37,899 in retirement, plus another $19,584 in Social Security benefits, for a total of more than $57,000, she said. Because the retirees will no longer be contributing to IPERS, nor Social Security or Medicare, their income as pensioners will be higher than when they were working, she said.

Patrice Beckham and Brent Banister, actuaries for Cavanaugh MacDonald's office in Bellevue, Neb., told the IPERS Investment Board on Thursday that compared to the universe of pension funds nationally, the Iowa retirement system's 82.7 percent funded ratio is respectable, although the goal is to be fully funded.

Four years ago, Beckham had bluntly warned Iowa pension officials that they faced a financial train wreck if they failed to address IPERS' long-term funding crisis. The problems were so serious the pension system's unfunded liabilities were amortized into infinity. That prompted the Iowa Legislature in 2010 to increase pension contributions and revise the benefit structure, both of which appear to be working, officials said.

Lisa Stange, a retired corporate executive and investment professional who chairs the IPERS Investment Board, said after Thursday's presentation that the pension fund's outlook is improving in large part due to stock market gains.

"We are very fortunate. For the last four years we have had an up stock market, and that has helped some of our problems in the past. It doesn't cure it," Stange said. "We still need to keep working on our contribution rates, as well as the benefits that we offer our employees, to make sure that we are offering them what we can absolutely fund, and making sure that the plan is sound."

Some of the benefit revisions authorized by Iowa lawmakers in 2010 included raising the number of years worked before being vested in the plan from four to seven and basing pension payments on the five highest salary years instead of the three highest years. In addition, early retirees face a greater reduction in benefits.

The contribution rate by public employees and local government to the main IPERS pension fund totals 14.88 percent of an employee's earnings. Sixty percent of the contributions are funded by government employers and 40 percent by the employees.

Some Iowa politicians and business leaders — including Gov. Terry Branstad and the Greater Des Moines Partnership — say it's time to explore alternative retirement options that would be less costly for taxpayers.

The IPERS system is known as a defined benefit pension plan. Retirees get a monthly check of a guaranteed amount. Many private-sector workers are now covered only by defined contribution retirement plans, such as 401(k) plans. The employee decides on a salary contribution level and may receive a company match. Such plans are less risky for employers because they do not promise a specific benefit when a worker retires.

Brad Hudson, vice chairman of the IPERS Benefits Advisory Committee and a lobbyist for the Iowa State Education Association, said the Iowa pension system is turning around more quickly than expected. He said he is willing to review options for retirement programs, but he wants to know if public employees would receive the same level of benefits or if the same contribution would provide fewer benefits.

State Rep. Mary Mascher, D-Iowa City, a retired teacher who is a nonvoting member of the IPERS board, said the current pension system can work as long as its members are responsive to problems when the system isn't fully funded. Other states have had problems because they have refused to make changes like Iowa has done, she said.

IPERS' UNFUNDED LIABILITIES, FUNDED RATIOS

2003: $1.86 billion, 89.62 percent

2004: $2.17 billion, 88.62 percent

2005: $2.28 billion, 88.69 percent

2006: $2.50 billion, 88.42 percent

2007: $2.26 billion, 90.16 percent

2008: $2.66 billion, 89.13 percent

2009: $4.89 billion, 81.19 percent

2010: $4.93 billion, 81.37 percent

2011: $5.68 billion, 79.89 percent

2012: $5.91 billion, 79.91 percent

2013: $5.78 billion, 81.02 percent

2014: $5.54 billion, 82.68 percent

Source: Iowa Public Employees' Retirement System