William Petroski

bpetrosk@dmreg.com

Gov. Terry Branstad opened a debate Monday over the future of public employees' pensions in Iowa, although he says he doesn't want to create financial hardships for government workers and he recognizes the issue requires substantial study.

State Treasurer Michael Fitzgerald, a Democrat, immediately responded by sounding an alarm over the fate of defined benefit pensions currently provided by the Iowa Public Employees' Retirement System, known as IPERS, which has 350,000 members. He said all of Iowa's public employees — police officers, school teachers, county and state workers and others — should be troubled by plans being explored by Republican politicians throughout the country to change public employees' pension benefits.

Some Iowa conservative groups and taxpayers' organizations have suggested it's time to shift away from IPERS' defined benefits pension program — which promises a monthly check of a guaranteed amount. They have suggested replacing it with a defined contribution program, similar to a 401(k) plan, which is less risky for employers because it does not promise a specific benefit when a worker retires. An actuarial study last year found that IPERS had long-term unfunded liabilities of more than $5 billion.

Branstad pointed out that many private companies have shifted to a defined contribution pension system in which an employee decides on a salary contribution level and may receive a company match that is invested. However, that type of change would be a significant step and would require substantial research and a transition that won't happen in the near future, he said. Benefits of existing public employees under the current system would need to be protected, he added, noting that some governments have simply changed pension benefits for newly hired public employees.

"I am open to considering changes, but I want to assure people that we are not looking at eliminating anyone’s benefits or changing it in a way that would create financial hardship," Branstad told reporters at his weekly news briefing. "So it is a complex, a difficult issue. A lot of people feel that the defined benefit system is not sustainable in the long term. But Iowa does have one of the best defined benefit systems under our IPERS' program — of any of the states."

Fitzgerald wasn't reassured by Branstad's remarks. "Every public employee in Iowa should be very concerned that there is a Republican mission to do away witih IPERS as a defined benefit plan. That’s coming," he said. "Pensions should be for the rank and file. They need to be protected."

The problem with defined contribution retirement plans promoted by Republicans, Fitzgerald said, is that they place the burden of financial risk on employees who are stuck with high fees for investments and who likely are not prepared to be choosing stocks and bonds.

“We want our second grade English teachers to work on being second grade English teachers. They don't have any skills in managing asset allocation and all those kinds of things. The same with firemen and policemen and county workers, the guy who is driving the dump truck," Fitzgerald said.

Shifting IPERS from a defined benefit pension plan to a defined contribution plan has been endorsed by conservative-leaning organizations that include the Iowa chapter of Americans for Prosperity, Iowans for Tax Relief, and the Public Interest Institute in Mount Pleasant. Any serious consideration of legislation to implement such changes has been avoided in the past because it would have been opposed by Iowa Democrats who controlled the Iowa Senate. But with Republicans winning control of the Senate on Nov. 8 while retaining a majority in the House, it's possible that bills could be discussed during the 2017 legislative session to make changes in IPERS.

An actuarial report released late last year by Cavanaugh MacDonald Consulting LLC showed that IPERS was 83.7 percent funded, leaving Iowa taxpayers on the hook for $5.45 billion in unfunded liabilities, although that was down from $5.91 billion in 2012. A new actuarial report is expected to be released this week.

IPERS fund, facing $5 billion shortfall, misses investment goal

Nationally, many public pension funds face huge shortfalls that have created worries among state and local government policy analysts. However, IPERS' outlook in recent years has been brighter because of stock-market gains and changes made by state policy makers. In an effort to shore up the IPERS' system, the Iowa Legislature in 2010 approved a host of benefit changes, including 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.

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

IPERS had a market value of $28.27 billion for the 12 months that ended June 30, state officials said. That included a 2.15 percent investment return, which fell short of an actuarial assumption that requires an annualized investment return of 7.5 percent. However, over the past 30 years IPERS has had an annualized investment return of 8.6 percent.

Branstad sparked a serious discussion about public employees' benefits in Iowa last week by proposing that health insurance be removed as a topic of collective bargaining from public employees' union contracts with the state, cities, counties and school districts. He has suggested premiums can be lowered by establishing one statewide master health insurance program for public employees, avoiding premium spikes that have occurred in some small insurance pools when a few employees have major illnesses or accidents.

Drew Klein, state director of the Iowa Chapter of Americans for Prosperity, said Monday his organization has been advocating a shift from a defined benefit to a defined contribution system for IPERS' pensions for the past two years.

"For us, it's one way that we can protect taxpayers. This is even more important because there seems to be differing opinions on what kind of interest we can expect on those IPERS' investments," Klein said. "I also think this would be better for employees as it would improve the flexibility of that retirement account if/when they leave state employment."

Don Racheter, a former Central College political scientist who is chief operating officer of the Public Interest Institute, describes a defined contribution pension system as a "win-win" for taxpayers who would be less likely to be stuck with huge pension liabilities and for public employees who would have the potential of higher investment returns. He also suggests giving existing public employees the option of staying with existing defined benefit pensions or switching to defined contribution plans.

Gretchen Tegeler, president of the Taxpayers Association of Central Iowa, said she agrees with Branstad that any changes in the IPERS' system should be carefully studied. However, she concludes it is essential to place new employees in a different plan structure in order to protect the interests of current members.

"Our view is that the sooner the review process begins, the better," Tegeler said. "Iowa may still be in a position that it can preserve most or all of what we have for current members, but only if we do not compound the problem by adding new members. There will come a point when the crowd-out effects of pension funding (on government budgets) will become unacceptable and higher taxes are not an option. Making changes in a crisis atmosphere is never good."

Supporters of IPERS say the current pension system can work as long as its members are responsive to problems when the system isn't fully funded. For example, State Treasurer Fitzgerald said he favors placing a cap on pensions for highly paid state executives to avoid situations where some retirees are raking in pension checks that exeed $100,000 annually. Furthermore, he worries that existing liabilities would balloon — doubling or tripling — if newly hired public employees weren't contributing to defined benefit pension funds needed to provide monthly checks to retirees.

Danny Homan, president of Council 61 of the American Federation of State, County and Municipal Employees, said he views IPERS as a sound program that has served Iowans well. He said a fallacy is being presented that certain changes in public employees' pensions will somehow eliminate existing funding liabilities for taxpayers.

“The liability doesn’t stop. You cannot get rid of the liabiity," Homan said. "Whatever the state does they will have to figure out how they will meet the liabilities, the commitments and the promises of the current system."

The Iowa Policy Project, a liberal-leaning research organization based in Iowa City, issued a report in 2013 that concluded that in Iowa and most other states across the country, public-sector pension funds remain strong and healthy, serving as models of the important role pensions play in assuring retirement security for working Americans.

Along with Social Security and private savings, defined benefit pensions became a foundation of the 20th century retirement system that made possible the middle class and eliminated endemic poverty among the nation's elderly, the report said. But that system has begun to unravel as many major employers, particularly in the private sector, have eliminated defined benefit pensions, researchers said.