Iowa worker retirement fund faces $5.7B shortfall

Iowa?s pension fund for retired public employees faces a long-term shortfall of nearly $5.7 billion, according to a consultant?s report, which also said changes made by the Legislature last year were a step toward fixing the problem.

The Iowa Public Employees? Retirement System, or IPERS, has about 325,000 members. A report issued Thursday by Cavanaugh Macdonald Consulting LLC said the fund ended the fiscal year on June 30 with a future potential payout of $28.3 billion, including a shortfall of $5.68 billion, The Des Moines Register reported.

The pension system is just under 80 percent funded, down from last year?s 81.4 percent and sharply lower than a decade ago when the system was 97 percent funded.

The newspaper reported Friday that some state officials are worried about IPERS? future, but there are no immediate threats to members? monthly pension checks.

?I have a lot of concerns about the sustainability of IPERS. The money that taxpayers owe is still growing, and that is something that has to be addressed,? said State Treasurer Michael Fitzgerald, who serves on the pension fund?s investment board

The pension system is poised for better performance in the wake of the Legislature-approved changes, said Patrice Beckham, an actuarial consultant from Cavanaugh Macdonald?s office in Omaha, Neb.

Starting July 1, the IPERS contribution will increase to 14.45 percent of wages, up 1 percent from this year. Sixty percent of the contributions are funded by government employers and 40 percent are paid by public employees.

Some of the benefit reductions authorized by the Legislature include 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. In addition, early retirees face a greater reduction in benefits.

Beckham noted the IPERS system?s investment portfolio had a strong year for the 12 months ending June 30, returning 19.9 percent.

She said she would be happier if the IPERS system were 90 to 100 percent funded. But the solid investment returns over the past year are welcome after recent ?brutal years? that hurt the system?s portfolio, and she said the shortfall can be amortized over 34 years. In the past, the amortization period had extended into infinity.

But Fitzgerald noted that the IPERS system is in far worse shape now than in the 1990s when it was nearly fully funded. He said lawmakers made a mistake in the past by getting rid of a cap on public employee pensions. In particular, he said he is now concerned that some highly paid state workers and school superintendents are in line for huge pensions that the system can?t afford long-term.

?I really think that raised havoc with the system,? Fitzgerald said. He suggested capping public employee pensions at a maximum of about $60,000 annually.

Brad Hudson, a lobbyist for the Iowa State Education Association, said changes made by lawmakers last year are a step in the right direction. The changes include increased contributions combined with future benefit reductions.

Beckham warned state officials two years ago they faced a financial ?train wreck? if they failed to address the pension fund?s long-term funding crisis. Her report Thursday had a more optimistic tone, and she noted that many states face more serious problems than Iowa.

?When we project this out 30 years, it tends to look good,? Beckham told the IPERS investment board. ?I think the outlook is positive.?