IPERS' unfunded pension liabilities rise to nearly $7 billion

The unfunded liability of Iowa's largest public employees' pension fund has increased to almost $7 billion amid recent actuarial changes that reflect lowered expectations for future investment gains, according to a report issued Thursday.

The changes are one factor behind higher contribution rates for the Iowa Public Employees' Retirement System starting July 1, 2018, that will raise annual pension expenses by $42.4 million for state and local governments and by $28.4 million for public employees.

Winneshiek County Treasurer Wayne Walter, who chairs the IPERS' Investment Board, said the unfunded liability is primarily a result of 12 years of underfunding that was addressed by the Iowa Legislature in 2010 by making reforms in benefits and contribution rates. But changes in economic assumptions approved earlier this year have had a more recent impact.

“The unfunded liability is higher than we would like, but it will get better and we are doing something about it," Walter said.

A new actuarial study for the Iowa Public Employees' Retirement System, which has about 350,000 members, shows unfunded liabilities totaled $6.96 billion for all membership groups on June 30, 2017. The pension system's assets had a market value of $30.8 billion, which was an increase of about $2.5 billion from a year earlier, according to the report by Cavanaugh Macdonald Consulting, LLC, of Bellevue, Nebraska.

IPERS' members include current, former and retired employees of state government, cities, counties, school districts and other government agencies.

Donna Mueller, IPERS' chief executive officer, said the pension system is headed in the right direction with a goal of amortizing the unfunded liability over the next 27 years. The funded ratio for all IPERS' members is 81.4 percent, which means there are currently about 81 cents in assets available for every dollar in liabilities.

"Pensioners should be assured that they will be receiving their benefits, their lifetime benefits," Mueller said. "This is is a pooled investment and a pooled risk on longevity. Pensioners are promised their benefits for life. They will receive it. Active members will be paying more, but they will also be working towards a strong retirement system.”

The actuarial report reflects changes in economic assumptions approved in March that have lowered the annual average target for IPERS' investment returns from 7.5 percent to 7 percent, which has resulted in an increase in the pension fund's long-term unfunded liabilities of nearly $1.4 billion. The changes have also revised factors involving inflation, wage growth, payroll, and interest on contribution balances.

Public employees and their government employers jointly contribute to IPERS a set percentage of employees' wages. Effective July 1, 2018, the contribution rate for IPERS' regular members will increase from 14.88 percent to 15.73 percent, including 9.44 percent for employers and 6.29 percent for employees.

The actuarial report was presented to IPERS' Investment Board Thursday as conservative policy groups and taxpayers' organizations have been urging the Iowa Legislature to shift the state's pension programs away from traditional defined benefit pension plans, which guarantee monthly checks to retirees. One alternative would be defined contribution plans, similar to 401k style plans used in the private sector that don't promise a specific retirement benefit and are less risky for employers.

Gretchen Tegeler, president of the Taxpayers Association of Central Iowa, said she believes IPERS has been more realistic in setting the long-term rate of investment return at 7 percent. But to deal with the resulting increase in the unfunded liability, a combination of benefit adjustments and contribution changes could have been used, she contended.

"Instead it was all loaded into contribution increases, which have now risen by 66 percent in the last 10 years. The trade-off is lower teacher salaries, higher class sizes, diminished state and city services, etc. It is a vicious cycle and further reinforces the need for review and evaluation," Tegeler said.

Nationally, public pension funds in many states have been in trouble. According a report in June by Bloomberg.com, pension fund problems have been worsening in 43 states. The report said the median funding ratio — the percentage of assets states have available for future payments to retirees — declined to 71.1 percent in 2016, down from 74.5 percent in 2015 and 75.6 percent in 2014. Among the worst states cited in the report were New Jersey, Kentucky and Illinois.

Danny Homan, president of Council 61 of the American Federation of State, County and Municipal Employees, said Thursday he opposes any major changes to the Iowa Public Employees' Retirement System. He describes IPERS as well run and doing a great job of protecting pension benefits.

"I don’t know of a single employee that I represent that would complain about the IPERS' rate that they pay," Homan said. "In reality, what IPERS is is deferred compensation. This isn’t a gift. This isn’t some employer giving them this retirement. This is a shared program, and the employees participate in this, and I don’t know many employees who would complain about it."

Brad Hudson, a legislative liaison for the Iowa State Education Association and vice chairman of the IPERS' Benefits Advisory Committee, said prudent decisions have been made to protect retirement benefits for Iowa's public employeees. This includes the recent changes in economic assumptions and legislation approved seven years ago, he added.

"We think that all members should realize that the system is strong and that their retirements are safe," Hudson said.

The Iowa Legislature's Public Retirement Systems Committee has scheduled a meeting on Dec. 18 discuss the state's pension programs. Gov. Kim Reynolds said in July she supports fact-finding efforts into Iowa's public employees' pension funds, but she has dropped plans for a task force to recommend changes in retirement programs.

Sen. Mark Lofgren, R-Muscatine, a non-voting member of the IPERS' Board, said Thursday he supports changes made in the past, but he anticipates both Democratic and Republican lawmakers will want to take a comprehensive look at Iowa's public employees' retirement programs in the months ahead.

"I think they have done some good things with IPERS. We just want to make sure that the money is there for everybody when the time comes," Lofgren said.