January 2012 Policy Study, Number 12-1
Iowa's Privileged Class: Time for a Change!
|Recent Pension System Changes|
The Iowa pension funds are managed by the IPERS Board and considered in the custody of the State Treasurer. There are two additional, significantly smaller pension funds, the Judicial Retirement Fund and the Peace Officers’ Retirement Fund which, are also in the custody of the State Treasurer. There is also a Municipal Fire and Police Retirement System, also separately funded. This study is not addressing issues of those funds in depth, other than to say there are under-funding issues with them as well as IPERS.
Interestingly, though the Legislatures of almost all states acted in 2011 to address their pension issues, the Iowa Legislature did virtually nothing. The only legislation passed was a minor bill, HF484, which directs the IPERS and other pension boards to divest themselves of any investments in Iran and requires an annual report on this activity.
The most recent changes made to IPERS were all done in the 2010 Legislative session, under former Governor Culver. These changes are currently in their first full year of implementation.
As reported by the National Council of State Legislatures, HF2518 increased contribution rates for both IPERS and the Peace Officers’ Retirement System (PORS).
The PORS plan already called for a generous employer contribution of 27 percent of salary by FY2013 – the upcoming fiscal year. The employer’s rate will now increase at 2 percent per year to 37 percent in FY2018. The 2010 change increases the employee contribution rate from 9.35 to 11.35 percent in FY2013. It also requires a “catch-up” contribution by state government of $5 million per year until it reaches a funding ratio of “at least” 85 percent.
The current PORS funding ratio is 67 percent. Even with the catch-up funding of $5 million per year, the current estimates are that an 85 percent funding ratio will not be reached until 2031 – 20 years from now.
The PORS fund has reflected typical investment returns over the last 10 years, averaging only 3.84 percent, though the goal is 8 percent. In addition to the changes made in 2010, it might be wise to revise the expected rate of return downward to reflect reality. In doing so, this will push meeting the 85 percent funding ratio out beyond the 2031 timeframe.
A police officer that is 50-54 years old, making an average salary of $81,400 and after retirement drawing a maximum pension of 88 percent can be expected to draw annual benefits of over $71,000. Children who today are only five years old will be the taxpayers expected to support these current workers in their retirement.
For the regular IPERS participants, contributions were already scheduled to increase on July 1, 2011 – the beginning of FY2012, the current fiscal year — to a total of 11.95 percent, 4.7 for employees and 7.25 for the government. The 2010 legislation increased the total contribution to 13.45 percent last July, and gave the IPERS board flexibility to increase or decrease the rate by 1 percent per year.
Other changes passed in HF2518 and signed into law do not take effect until July 2012. These include increasing the years for vesting from four to seven, and the retirement age from 55 to 65. This only affects employees not vested by July 1, 2012.
The retirement benefit will now be figured based on a high-five salary, instead of a high-three, with a phased implementation for currently vested employees.
The penalty for early retirement was increased to 6 percent of each year the employee retires before age 65. The current penalty is only 3 percent, and is applied to the “normal” retirement age for an individual employee, which previously could be as early as 55.
A final change to IPERS done in 2010 was the implementation of early retirement incentives, SF2062. This incentive program has now ended. Employees who were 55 years old or older, with 10 years of service, had until June 24, 2010 to take early retirement. The incentives included five years of health insurance and other financial benefits.
Specifically, “the incentive includes payment over five years of an amount consisting of the value of the employee’s accrued but unused vacation leave plus $1,000 for each year of state employment service up to 25, paid at the rate of 20 percent of the total per year.”
Employees were also prohibited from being re-hired in any way – temporary, part-time, by contract, or full-time – unless they return as elected officials. The agencies were prohibited from filling the vacated positions without specific authorization. This program was estimated to result in savings of $57.4 million in FY2011.
The October 2011 report submitted by the Iowa Department of Administrative Services indicated that of 2,067 “retired” positions, 765 have been refilled and 1,302 remain vacant. Agencies participating in the program included the Central Payroll, Department of Transportation, and Community-Based Corrections.
The costs for the first annual years of service payouts and health insurance premiums for the three agencies totaled almost $31 million ($30,717,073). The actual, versus projected, savings are not yet available.
The total number of IPERS eligible employees who retired in FY2011 was 7,360, according to Donna Mueller, CEO of IPERS.
Retirees and their residual beneficiaries combined are almost 100,000 at this time (98,312), up from 93,513 in FY2009.59 “Active” membership or the number of employees paying into the system, for which the state government pays into the system, is declining, from 165,626 in FY2009 to 164,436 in FY2010. To some extent, this reflects the special retirement incentive of 2010.
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