Pension Sustainability: Iowa

Analysis of Iowa's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Iowa's pension system for teachers is 80.8 percent funded and has a 34-year amortization period. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state 34 years to pay off its unfunded liabilities. While its funding ratio meets the recommended minimum standard, the amortization period is just above the recommended 30-year period. The state's system is not financially sustainable according to actuarial benchmarks.

In addition, Iowa commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 8.07 percent is slightly excessive, considering that districts must also contribute 6.2 percent to Social Security. The mandatory employee contribution rate to the defined benefit plan of 5.38 percent is reasonable. Legislation only recently allowed the pension system to raise contribution rates to meet actuarial recommendations; however, rates can only increase by a total of 1 percent for employee and employer contributions combined (higher than the previous restriction of 0.5 percent total a year).  

Citation

Iowa Public Employees' Retirement System Actuarial Valuation Report as of June 30, 2010 http://www.ipers.org/publications/misc/pdf/financial/valuation.pdf Iowa Public Employees' Retirement System Contribution Rates http://www.ipers.org/contributionrates.html

Recommendations for Iowa

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of less than 30 years to allow more protection during financial downturns. However, Iowa should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Iowa acknowledged the factual accuracy of statements related to funding ratio, years to amortize, and amount paid in contributions. However, the state indicated it could not say the same as to whether the contribution rate is too high given the value of the guaranteed lifetime benefit that is earned. Also, Iowa disagreed that the system is not sustainable.

Last word

NCTQ maintains that the employer contribution is slightly excessive and may grow to be even more burdensome for district budgets as rates increase to lower the system's amortization period. The amortization period is too long according the GASB standards, which suggest a 30-year amortization period.