Top Iowa fiscal officials want IPERS cap

Unfunded liabilities concern auditor, treasurer

Mike Fitzgerald
Mike Fitzgerald

Two top state fiscal overseers Friday advocated that Iowa policymakers reimpose yearly caps on government employee pensions as a way to shore up a projected long-term shortfall in the Iowa Public Employees’ Retirement System and limit opportunities for IPERS recipients to “game” the system.

State Treasurer Mike Fitzgerald and State Auditor David Vaudt said IPERS is in “solid” shape and they applauded action by lawmakers in 2010 to increase contribution rates for IPERS-covered workers and government employer employees as well as change how benefits are calculated effective at the beginning of this month.

However, during a joint appearance on Iowa Public Television’s “Iowa Press” show, they expressed concern that stock market volatility, longer life expectancies and other factors have caused IPERS unfunded actuarial liability to grow from $327 million at the end of fiscal 2000 to $5.7 billion at the end of fiscal 2011. A consulting firm calculated IPERS ended fiscal 2011 with a future potential payout of $28.3 billion, including a shortfall of $5.68 billion.

Vaudt said it was “alarming” that a pension system that was 98 percent funded in 2000 has slipped to around 80 percent funded now with the gap continuing to widen. Earlier this week, he advised Gov. Terry Branstad and state lawmakers to consider using one-time surplus funds to help address the IPERS imbalance but Fitzgerald said Friday “we don’t need to go to the taxpayers for any more money for IPERS.”

Instead, the state treasurer -- a voting member of IPERS’ board of directors – said upper limits should be re-established for covered salaries, probably at around $100,000 per year, to keep benefits from spiraling upward for the system’s top earners while protecting the overall health of a system that about 330,000 Iowans depend on.

Fitzgerald said the problem began when the Legislature and governor agreed to get rid of the caps on IPERS pensions.

“They took that cap off and now you have some employees in state government that make as much as $250,000 can retire and get like $160,000 a year pension,” said Fitzgerald. “That’s broke the bank.” He said setting a yearly salary cap at around $100,000 for eligible IPERS benefits would limit top-end pensions to $60,000 and better stabilize the long-term health of the system.

“The taxpayers have put in more and the employees are putting in more, well why all of a sudden isn’t it working? Let’s go back in and put that cap on and it’ll work just fine. That’s my view,” the state treasurer added. “I think we’ve got to make an adjustment to the system. When you get to those high ranges, there’s ways people game the system and that’s hurt IPERS.”

According to IPERS officials the Legislature removed the covered wage ceiling of $44,000 in 1996. The wage cap then became the federal limit of $160,000 in 1997, which has since grown to $250,000. In 2011, IPERS’ actuary was asked to consider whether larger salaries were responsible for a funding shortfall and determined “this is not true and, in fact, rolling it back could actually increase the liability.”

IPERS officials also concluded that lowering the ceiling could lead to increased contributions, would produce insignificant savings because about 11 percent of IPERS members currently have yearly salaries above $65,000, and could result in legal actions if contributions were collected on wages above the ceiling but benefits were not calculated on wages above the ceiling.

Donna Mueller, IPERS chief executive officer, said system administrators have implemented “spiking” controls to address concerns like the ones Fitzgerald addressed that limit inflated wages and prevent overpaying benefits that are based on a formula of years of service, average salary and a multiplier. They also have implemented a penalty for early retirement similar to the reduced benefit a Social Security recipient receives if they leave work at 62 rather than retiring at age 67.

Other benefit reductions authorized by the Legislature 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 rather than three. Sixty percent of the contributions are funded by government employers and 40 percent are paid by public employees.

“I think we’re on solid footing and we rank very well compared to many, said Mueller, who noted the “litmus test” for retirement systems is if they are funded at 80 percent or above they are considered to be in very good financial shape.

At the same time, Mueller said she has been trying since 2004 to get elected leaders to address the under-funding dilemma – a problem that was exacerbated by two recessions in the last decade.

“We all got hit by the great recession and we’re all trying to recoup that hit and recover from it and making adjustments,” she said.

At the same time, Mueller said she has been trying since 2004 to get elected leaders to address the under-funding dilemma – a problem that was exacerbated by two recessions in the last decade.

“You don’t have to turn it around it on a dime and go from 80 percent fully funded to 100 percent fully funded overnight. That’s not necessary. We have enough reserves to pay pensions for 20-plus years. The sooner we act to make some corrections, the longer we have that cushion and the better it is as far as correcting the funding dilemma,” she added. “I won’t deny that there are some funding challenges. There are, that’s why we’ve taken some action. But it plays out over the career of the public employee.”

House Speaker Kraig Paulsen, R-Hiawatha, said proposals offered by Fitzgerald and Vaudt are among a number of options available for consideration. However, he said he wanted to see what the impact of the changes lawmakers made in 2010 that are now in effect will be before taking further action.

“Clearly being at 80 percent is not where we want to be,” he said. “I think when we come back in next January, we’ll have a much better picture of what’s going on there and we’ll be able to make some good decisions.” 

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