Billions and billions of seconds ago, in a decade long gone, I wrote of potential legislation aimed at reversing the downward slide of funding IPERS’ promised benefits. What has happened since that prior lost decade ending in 2009?

The BAC’s recommendations on contribution rates and future benefit changes are incorporated in an omnibus pension bill approved by the House State Government Committee. The bill number is House File 2502 . The omnibus pension bill covers legislation for all the state pension plans. The portion directed at IPERS is Division II, which begins at page 9, line 8. IPERS developed a Q&A explaining the changes contained in the bill that you can access here.

Next step in the legislative process? The bill moves to the Appropriations Committee, then to the House floor for debate and a vote. If passed by the House, it moves to the Senate for a similar process of committee consideration and floor debate. Well, maybe the legislation isn’t moving at the speed of light, but it is moving!

You can submit comments or questions about the bill under the comment section to the right of this blog. Remember, if you are providing personal information via regular e-mail or this blog site, do not transmit your social security number. Please use your IPERS’ ID number.

Donna

The Public Retirement Systems Committee (a joint House and Senate legislative committee) adopted the BAC’s recommendations to be forwarded to the House and Senate State Government Committees. What does this mean? It’s the first step in the legislative process — a very positive first step for the future health of IPERS.

To see a full description of the BAC’s recommendations, please see my last blog: Woulda, Coulda, Shoulda.

The next step will be in January after the legislative session convenes on Monday, January 11, 2010. Now, whether any legislation affecting IEPRS is enacted this year, and if so, whether the legislation looks anything like the recommendation is anyone’s guess.  But regardless, no changes would take effect in 2010. 

A very compressed schedule has been proposed for the 2010 legislative session — so stay tuned!

Donna

The Benefits Advisory Committee (BAC) had some tough decisions to make on Monday. This was their last chance to meet prior to next Monday’s meeting of the Joint Legislative Public Retirement System Committee and the Legislative Committee will be looking for recommendations from the BAC.

The end result was a recommendation that contained a crucial element that  “woulda, coulda, and shoulda” been taken when it was the BAC’s recommendation in the 2004 legislative session. In 2004, the BAC advised the legislature to increase contribution rates for regular members to 13.45% effective July 1, 2005. In 2004 that was the only recommended action. If the action “woulda” been taken, the unfunded actuarial liability (UAL) “coulda” been reduced dramatically before going into the depth of the 2008/2009 recession and we “shoulda” been in a better funding position today.   

But now, without the reduction in the UAL before entering into this current recession, the BAC has to look at benefit reductions in addition to contribution rate increases. The BAC’s recommendation to the legislature is: 

1.  Contribution rate recommendation:

(a)     Increase the contribution rate to 13.45% (total for both employees and employers) starting in July 2011.

(b)     Allow the rate to go up or down by a limit of 1 percentage point annually without applying a maximum cap on the contribution rate (when the rate would decrease, switch to a 30 year closed amortization in the calculation). 

2.  Plan design changes recommended for July 1, 2012:

(a)     Change to a seven-year vesting period from the current four-year vesting period. Those already vested retain vested status.

(b)    Use the highest five years of wages to figure the final average salary for the benefit calculation (currently use three years).

(c)     Reduce benefits 6% a year (closer to the true actuarial cost) for anyone who retires before meeting the Rule of 88 or Rule of 62/20, or before age 65. The reduction would be calculated from the year the member turns age 65. Current reduction is 3% a year from earliest unreduced rule. 

This recommendation leaves intact the Rules of 88 and 62/20, and the current multiplier of 2% for years of service 1–30 and 1% for years of service 31–35.  

This recommendation was one of the last studies that the actuary presented to the BAC. All the studies presented to the BAC are posted on the BAC meeting page.

Donna

I continue to receive requests for assurance that any transition rules for changes in benefits take into account a particular circumstance (age and years of service) so that the inquirer is untouched by the change. I understand the desire for definitive answers as you plan your retirement—whether you plan to retire next year, five years from now, or ten years from now.

Remember that we are working to find the balance between protecting benefits earned to date, while looking to everyone to pitch in a little to preserve a sound lifetime benefit. We can do this with transition rules. Transition rules spell out “how we would get from here to there” if IPERS does change. Transition rules are a way of making sure we protect benefits you have already earned. They would help us ease in changes.

Let’s start by looking at the transition rules that have been enacted.  Oops, there are no rules adopted because there are no changes approved by the legislature! I would need to transcend the time spectrum and look into the future to see what, if any, action was taken by the legislature in the 2010 or 2011 session. (Remember it took 3 legislative sessions before there was any movement on contribution rates.) 

While I don’t have the ability to see into the future, I can relate some of the transition rules used in the studies. We used transition rules in the studies because we must be clear about what we are studying to estimate financial impact. Staff came up with rules that would prevent reducing benefits already earned. Some of the studies’ transition rules are very straightforward (such as keeping the multiplier the same for all years before the transition date, and applying a new multiplier only to years after the transition date). Others are more complicated. 

You can look at the transition rules used in the studies, but they really won’t answer your questions unless the particular rule is adopted by the legislature. The transition rules applied in a study were distinctive to that particular study. The BAC has reviewed eight studies and will look at two more studies on Monday, November 2, 2009. 

Rather than explain each study’s transition rules here, I suggest you look at the descriptions included in the actuary’s presentations on the studies. You can find them on the BAC page of our Web site or here. 

Donna

A line from a Beatles song popped into my head as I thought about the smart, dedicated members of the BAC (Benefits Advisory Committee) who met this past Monday.

“We can work it out.” 

BAC members represent very different interests, but they came to the table ready and willing to work on a long-term plan for IPERS. They weren’t pining for better days before the recession—a yesterday when all our troubles seemed so far away.  They weren’t waiting for someone else to solve the problem. They weren’t asking for ideas only to criticize them. 

BAC members are willing to take a turn in the driver’s seat, knowing that it will be a long and winding road. But the BAC has a destination—preserving secure, defined retirement benefits for future generations. 

After looking at several studies that examined only contribution rates as a solution, the BAC zeroed in on two possible paths to a balanced 30-year funding plan. The actuary will study them and report to the BAC at its November 2 meeting. 

Study 1

(a)     Increase the contribution rate to 13.45% (total for both employees and employers) starting in July 2011.

(b)     Allow the rate to go up or down by a limit of 1 percentage point annually without applying a maximum cap on the contribution rate.

(c)     Change to a seven-year vesting period.

(d)    Use the highest five years of wages to figure the final average salary for the benefit calculation.

(e)     Reduce benefits 6% a year (instead of the current 3%) for anyone who retires before meeting the Rule of 88, Rule of 62/20, or age 65. The reduction would be calculated from the year the member turns age 65.

(f)      Apply benefit changes in (c) through (e) starting July 2012 with transition rules to make the changes workable for current members.

(g)     Retains the Rules of 88 and 62/20 and the current multiplier of 2% for years of service 1-30 and 1% for years of service 31-35. 

Study 2

(a)     Increase the contribution rate to 12.45% starting in July 2011.

(b)     Allow the contribution rate to vary up to 1 percentage point annually but cap the rate at 15%.

(c)     through (f) Same as above and retains the Rules of 88 and 62/20.

(g)     Reduce the multiplier to 1.9% for all years of service up to a maximum wage replacement of 65% of final average salary. 

As the BAC continues its journey, I know some back-seat drivers may criticize its route. That’s fine. We’ll continue to listen to criticism as well as ideas.  We are talking about what it takes to sustain a retirement system that has been around for more than 50 years—that route shouldn’t be a swift autobahn, but a long and winding road of an open deliberate process. 

Regardless of the path the legislature eventually picks for IPERS, I’m sure we can get to our destination. We CAN work it out. And we will. 
Donna

 PS:  Oh yeah, you can probably tell that I’m from the Beatles generation!

Remember the old game of “telephone” played in a circle of friends? One person would whisper a statement to the person next to her. She would repeat the statement to the person next to her. This would repeat itself until the statement made it around the circle to the first person and that person wouldn’t recognize the statement as the one she originally made!

I believe that is happening with members repeating what they have heard about IPERS’ benefits. The latest rumor is being passed among members who are concerned about being laid-off. The rumor is that if you are laid off, the only IPERS’ benefit available is a lump-sum payment instead of a retirement benefit. 

NOT TRUE! 

Now this telephone rumor probably started because one individual who was laid off decided to take a lump sum payment. That might have been the right decision for that person, but it doesn’t mean it applies to everyone.  

If you are laid off (I’m not talking a furlough), you have all the benefit options open to you that you would have if you quit your job. You can file for retirement if you are eligible for benefits (such as age 55 for a regular member). If you aren’t eligible, you can leave your money in IPERS and start benefits when you are. You also can take a refund (lump-sum payment) or roll your refund into an IRA.  See our publication here.

Psst–pass it on! 

Donna

A few reports have stated IPERS is seeking a bailout. This is ridiculous! 

IPERS’ Benefits Advisory Committee asked IPERS’ consulting actuary to study options for balancing a long-term funding shortage. The studies reported to the Benefits Advisory Committee looked at reducing future benefit accruals and increasing contributions to the fund. 

Contributions are not paid in a lump sum, they are paid over time. Contributions are set as a percentage of pay. Currently employees pay 4.3% of their pay into IPERS. Employers contribute 6.65% of the employee’s pay into IPERS. Yes, public employers get their money from taxes, which in turn they use for employee salaries and benefits. Yes, IPERS’ contribution rates affect state, city, county, and school budgets. But to imply IPERS needs a bailout is just plain wrong.  

No one–not the Benefits Advisory Committee, not IPERS, not IPERS’ consulting actuary asked or will ask the Iowa Legislature for an infusion of General Fund money. 

IPERS benefits are prefunded. This means that contributions and investments on these contributions will pay benefits 20 to 30 years from now. How many others can say they plan that far ahead?

Donna

The Benefits Advisory Committee took no position yesterday on benefit studies already completed. The BAC decided instead to hit the books again with a couple more studies it will review at its October 5 meeting. The BAC wants to review the effect of increasing contributions before further studying changes to benefits.   

The BAC’s goal is to preserve IPERS as a defined benefit plan that provides predictable guaranteed benefits. Because we are tackling the impact of the recession now rather than putting it off, I am confident we will find ways to rebalance long-term funding. 

The BAC asked IPERS’ consulting actuary to first look at raising contribution rates for regular members to 13.45%, with possible additional rate changes not to exceed 1 percentage point a year. A second study will look at the impact of raising contribution rates annually by 1 percentage point without the initial bump in the rate. The studies maintain the current practice of employees contributing 40% and employers contributing 60% of the contribution rate. The studies change rates effective July 1, 2011 to give notice for budgeting. 

Current law authorizes increases in the contribution rate by a one-half percentage point annually. Under the law, the contribution rate will reach 11.45% on July 1, 2010. The actuary estimates the needed contribution rate in 2010 is 13.85%.  

The October 5, 2009 meeting of the BAC starts at 1 p.m. at the IPERS office. It is open to the public. You can review the actuary’s presentation on studies completed so far in the BAC meeting section  of our Web site.

Donna

Most of the comments and questions sent to IPERS UpFront continue to ask how changes to the Rule of 88 will affect the sender. Please see my previous blogs entitled Crystal Ball Gazing and Ending Early Retirements for more detail.

A brief recap is that:

1. No changes have been enacted. IPERS cannot make any changes, only the legislature has that authority. IPERS and the Benefits Advisory Committee are studying changes to discuss with the Public Retirement Systems Committee of the legislature.

2. If you already have the Rule of 88 (your age plus years of service as of today equals 88), then you will still be eligible for the Rule of 88 under any changes that are being studied.

3. If you have the Rule of 88 the day before the effective date of any legislative change to the Rule of 88, you will still be eligible for the Rule of 88.

4. If you are close to the Rule of 88 at the time any changes take effect, whether you still are eligible for the Rule of 88 will depend upon the type of transition rules (grace period, grandfathering, etc.) the legislature enacts. IPERS will strongly recommend delayed implementation and transition rules to allow people close to retirement time to plan.

5. What is the effective date of any changes? As noted above, no changes have been enacted. I cannot speculate on whether changes may be enacted or when changes may be enacted.

Please stay posted for updates through the legislative session.

 Donna

In my previous blog, I stated that no changes had been made and that people did not have to be concerned about timing their retirements this calendar year. I wish I could be as confident in predicting when changes may take effect, exactly what those changes will be, and how they will affect each person.

Questions submitted to the UpFront blog have asked for advice on how changes will affect the sender individually. It may seem that all I need is the sender’s age and years of service and I should be able to answer the question. However, it is difficult to give definitive, reassuring answers when we don’t know the types of changes the legislature may, or may not, adopt. Another complicating factor in each case will be the effective date of any changes and whether there will be a transition period or transitional methodology in implementing any changes.

For example, one of the changes included in the study is moving to a five-year final average salary from a three-year final average salary in the benefit computation. One of the questions has been how this provision will affect the member’s retirement benefit if she retires in May 2010 or in 2011. Oh, for a crystal ball!

I don’t know whether the legislature will change the final average salary computation to five years. If such a change is legislated, drawing retirement before the effective date is one way to preserve your three-year average. However, as with all the changes under discussion, we have discussed various ways of transitioning to the changes.

For example, with a change in final average salary from three to five years, a possible transition rule would take a snapshot of every member’s three-year final average salary the day before the effective date of the change. We would preserve the snapshot in the member’s file. If the member retires after the effective date of the change, the member’s five-year final average salary at the date of retirement would be compared to the member’s three-year average snapshot. We would use the greater of the two averages in the benefit formula.  

That is one way we currently envision a transition. Another transitional approach may be a delayed implementation date of all or some changes to allow current members to plan their retirements. The best I can advise anyone at the moment is to stay tuned for news during the 2010 legislative session. 

When legislative action gives a more definite shape to benefit changes, a counseling session with a benefit counselor would be the best route to take. Counseling sessions may be in person at the IPERS office or during one of the many regional sessions.  Counseling is also available by phone.  To talk to a counselor, call 1-800-622-3849. You can also find the counseling schedule in the Member section of our Web site.

Without a working crystal ball that’s the best advice I have at this time.

Donna