CEDAR RAPIDS — Iowa’s public employee retirement program earned an investment return of 6.65 percent last year, but that was lower than expected and resulted in a net loss of $108 million, according to an annual valuation report.
As a result of the lower than anticipated earnings, IPERS — Iowa Public Employees’ Retirement System — has a larger than anticipated unfunded actuarial liability. IPERS covers about 350,000 employees of state and local governments, including schools, with 52 percent either retired or inactive.
The investment return on the market value of assets for fiscal 2016 was 2.15 percent, according to the report by Cavanaugh Macdonald Consulting, LLC, which prepared the report for the IPERS board. Due to asset smoothing and the deferred investment gains from prior years, the investment return on the actuarial value of assets was 6.65 percent — lower than the assumed 7.50 return. That resulted in a larger than anticipated unfunded actuarial liability.
However, the firm did not recommend raising contribution rates, which now are about 15 percent of an employee’s wages. Employees contribute 5.95 percent and public employers contribute 8.93 percent.
The report comes on the heels of Gov. Terry Branstad’s statement Monday that while he is open to looking at changes in the public employment program, he doesn’t see that happening in the near future.
Responding to a reporter’s questions, Branstad said many private sector companies and some states have moved from defined benefits retirement systems, such as IPERS, to defined contribution systems. Many pension experts believe defined benefits program are not sustainable.
However, he continued, “Iowa does have one of the best defined benefits system under out IPERS program of any of the state. Certainly ours is better run than most states.”
Any change in IPERS would “take substantial study and you need to know what the financial impact will be,” Branstad said. “First of all, you want to protect the people under the present system so their benefits are protected.”
Some states have moved to defined contribution systems, the governor continued.
“It’s an issue that is something that needs significant study and research in order to know what the implications are of making a change of that magnitude,” Branstad said.
In its valuation, Cavanaugh Macdonald said it was presenting a “snapshot” view of IPERS’ financial condition. It described the increase in the unfunded actuarial liability as an “unfavorable experience.” The liability for the three membership groups covered by IPERS is $5.586 billion -- $108 million more than the expected $5.479 billion.
Overall, IPERS, which has $28.3 billion in assets with $17.7 billion in liabilities and is 83.9 percent funded. To achieve 100 percent funding, outside experts say the state would have to budget an additional $400 million a year for 25 years.
In the year ending June 30, IPERS paid $1.8 billion in benefits last year with an average annual payout of $16,149. In Linn County, more than 5,700 members receive nearly $101 million in benefits. In Johnson County, about $52 million was paid to 3,000 beneficiaries.
The projected payroll for the IPERS members for the coming year is $7.8 billion — a $46,399 average and a 2.5 percent increase from the previous year.
IPERS’ long-term financial health of IPERS is heavily dependent on future investment returns and systematic contributions at the full actuarially determined rate. Assuming all actuarial assumptions are met in the future, the system’s funded ratio is expected to improve over the long term, Cavanaugh Macdonald said.