PUBLIC RETIREMENT SYSTEMS

December 18, 1997 - Third Meeting

MEMBERS PRESENT

• Senator Sheldon Rittmer, Co-chairperson
• Representative Mona Martin, Co-chairperson
• Senator Michael Connolly
• Senator Richard Drake
• Senator John Kibbie
• Senator Mary Lundby
• Representative John Connors
• Representative Jack Drake
• Representative Chuck Gipp
• Representative Rick Larkin

MEETING IN BRIEF

Minutes prepared by Richard Nelson, Legal Counsel
Organizational staffing by Ed Cook, Legal Counsel

1. Administrative Business.
2. Judicial Retirement System.
3. Peace Officers Retirement System.
4. Iowa Public Employees' Retirement System (IPERS).
5. Municipal Fire and Police Retirement System.
6. Consolidation.
7. Additional Committee Discussion and Recommendations.
8. Written Materials Filed With the Legislative Service Bureau.

COMMITTEE BUSINESS

1. Administrative Business.

Convening and Adjournment. The meeting convened at 10:15 a.m. on Thursday, December 18, 1997, in Room 116 of the State Capitol and adjourned at 3:00 p.m.

Agenda for Meeting. The Committee received additional actuarial information from several of the public retirement systems concerning proposed recommendations, received a report concerning the issues involved if the various public retirement systems would be combined in some manner, and discussed a proposal from the Governor and the Auditor regarding the Iowa Public Employees' Retirement System (IPERS). The Committee made several recommendations for legislative consideration concerning public retirement and postponed consideration of other potential recommendations until a fourth meeting of the Committee.

Next Meeting. The Committee tentatively set the date and time for a fourth meeting of the Committee for 11:00 a.m., January 12, 1998. A meeting location will be determined.

2. Judicial Retirement System.

Ms. Peggy Sullivan, Director of Finance and Personnel, Judicial Department, discussed an actuarial report regarding the effect on the Iowa Judicial Retirement Fund of three proposed changes to the law. The proposed changes would be to change the maximum benefit a judge may earn from 50 percent of the judge's basic annual salary upon separation of service to 60 percent, to allow Associate Juvenile Judges and Probate Judges to join the Judicial Retirement System, and to establish a $500 minimum monthly benefit payable to retired judges and their surviving spouses of judges who retired prior to 1979. Ms. Sullivan referenced a handout detailing the effect upon unfunded accrued liability, annual pension cost, and annual pension cost as a percentage of pay for each of the proposals being considered. Committee discussion centered on the merits of increasing the maximum benefit from 50 to 60 percent of basic annual salary gradually rather than all at once, the impact of the senior judges program on retirement benefits, and the amount payable to vested judges leaving the system. Ms. Sullivan was requested to obtain and provide information at the next meeting of the Committee concerning the cost of the proposals presented if the proposal to increase the maximum multiplier from 50 to 60 percent was phased in gradually in increments of 2 percent per year.

3. Peace Officers Retirement System.

A. Discussion.

Mr. Carroll Bidler, Director of Administrative Services, State Department of Public Safety, and Ms. Diane Reid, Iowa State Troopers Association, presented additional actuarial information and analysis concerning the projected cost for the proposed benefit enhancements for the Peace Officers Retirement System. Mr. Bidler and Ms. Reid indicated that the proposed enhancements would not jeopardize the funded status of the plan. Mr. Al Chrystal, President, Iowa Retired Peace Officers' Association, related that some members of the system have felt that the system operates in a discriminatory fashion against younger officers, favoring higher salaried individuals with many years of service. Senator Michael Connolly indicated that he had heard similar complaints and inquired as to whether the proposed increase from 1.5 percent to 2 percent for each additional year of service beyond-years might exacerbate this problem. A letter from Mr. Jim Barr, past president of the Retired Peace Officers' Association, relating to retired officer benefit enhancements was referred to the Committee for further study and consideration.

B. Recommendations -- Peace Officers Retirement System.

The Committee made the following recommendations:

• Increase the maximum years eligible for credit for extra years of service over 22 years from eight years to 10 years (a maximum of 32 years instead of 30 years) for those who retire July 1, 1998, or later.
• Allow full retirement benefits with no minimum age requirements for those retiring on or after July 1, 1998, and who have 30 or more years of service.
• Improve the percent for increasing monthly benefits (the escalator) to 33 1/3 percent for those receiving 30 percent and 16 2/3 percent for those receiving 15 percent of their final average compensation.
• Allow all retirees to receive extra credit for their years of service over 22, up to eight additional years, with an increase in benefits of 1.5 percent for each additional year.
• Increase the credit for additional years of service from 1.5 percent to 2 percent for each additional year of service beyond-years for those retiring on or after July 1, 1998.

4. Iowa Public Employees' Retirement System (IPERS).

A. Alternative Proposals.

Mr. Greg Cusack, Chief Benefits Officer, presented additional information relating to the actuarial cost of prioritized enhancements to the system expressed in terms of additional years to amortize the unfunded liability. Mr. Cusack indicated that the total of all the enhancements listed on his handout would be an additional amortization period of 10.9 years. He noted that the amortization period as of July 1, 1997, was nine years, and the total amortization period with the proposed benefit enhancements would be 19.9 years. Mr. Cusack also indicated that legislation over the past 30 years has significantly boosted some retired individuals' benefits up to a respectable level, with retirees who retired prior to July 1, 1986, the farthest from parity. Considerable Committee discussion was devoted to the proposal from the Governor and the Auditor to provide for a dividend distribution to post July 1, 1990, retirees that would be based upon favorable actuarial experience; for not adopting any new long-term benefit enhancements; and to provide for a distribution to active IPERS members once the unfunded liabilities of the system are eliminated. In response to inquiries, Mr. Cusack indicated that a favorable experience dividend is not the same as a guaranteed payout. The intent of the proposal would be to accumulate funds for distribution to retirees even in years when the investments in the system are not doing well. Mr. Cusack explained that Alternative I of the original report -- essentially recommending no changes to the current system -- reflects conversations with the Governor. Alternative II was arrived at with the input of various constituent groups. In the intervening period, the Governor and the Auditor of State reviewed the proposals and agreed to support the favorable experience dividend concept in the form of "gain sharing," and not to recommend any additional benefit enhancements.

Senator Connolly expressed the understanding that both original recommendations were financially responsible in the opinion of the Buck consultants, IPERS management, and the constituent groups, and he indicated support for some or all of the recommendations contained in Alternative II. Mr. Cusack noted that the Governor should be commended for having exerted no pressure regarding the proposals, and Ms. Linda Hanson, Director, Department of Personnel, commented that it was never contended that all the proposed benefit enhancements could be undertaken simultaneously - the intent was to stretch out implementation over time. Recommendations for adoption of the favorable experience dividend, or gain sharing concept, could preclude further benefit enhancements, and Senator Lundby expressed hesitation at endorsing one option at the expense of another, indicating that it could be premature to act without further evaluation. Concern was expressed by several Committee members that the Governor and Auditor of State's proposal did not reflect constituent input.

B. Benefits Advisory Board.

Ms. Linda Hanson provided the Committee with some additional thoughts regarding the merits of creating an IPERS Advisory Board. Ms. Hanson indicated that she would envision the purpose of the board is to review IPERS benefit policies and procedures, to provide a forum on benefit plan design with constituent input, and to issue nonbinding recommendations relating to benefit policies and procedures. She believes the board would utilize a prudent person standard of conduct and act for the benefit of the general IPERS members rather than from the viewpoint of their own constituencies. The board could be modeled after the investment board, with nine members incorporating academic, actuarial, and employee benefits experience, along with constituent and legislative members. The advisory and investment boards could meet jointly at least annually for mutual dialogue. Ms. Hanson noted that a majority of states have some form of board of trustees, with varying responsibilities and diverse methodologies, and that a perfect system does not exist. Ms. Hanson expressed confidence that it is understood that the fund is for the exclusive benefit of its members and that an advisory board would enhance inclusiveness and provide input from a variety of sources. Senator Rittmer suggested that a future committee might investigate whether some form of restructuring might be in order, and Ms. Hanson indicated that she would await further instructions.

C. Committee Action.

• The Committee recommended that consideration of IPERS benefit enhancements be postponed until the next Committee meeting to more fully consider the proposal from the Governor and the Auditor of State. Additionally, staff agreed that proposed legislation will be prepared for consideration at the next meeting regarding modifying eligibility for retirement for a narrow class of IPERS beneficiaries who failed to become eligible for greater retirement benefits based upon the death of the IPERS member prior to becoming eligible for full retirement benefits (essentially, the Virginia Mortenson situation related at the November 18, 1997, meeting).
• The Committee rejected a motion to adopt a package of benefit enhancements that would establish a favorable experience dividend for post-July 1990 retirees; provide a 10 percent benefit adjustment for pre-July 1986, retirees; allow 100 percent of any consumer price index increase to be considered when establishing the dividend adjustment for pre-July 1990 retirees; permit, once the IPERS' actuary determined it was affordable, the normal retirement pursuant to the rule of 85 rather than 88 or upon reaching 62 years of age with 20 years of service; and provide a partial refund of the employer account balance upon a member's termination from IPERS.

5. Municipal Fire and Police Retirement System.

Mr. Dennis Jacobs, Executive Director, appeared in support of the System's proposals. The Committee recommended the following:

• Adopt the legislative package proposed by the MFPRSI board concerning the disability inequity issue, the establishment of an unemployment compensation offset, federal act compliance, providing subrogation rights for ordinary disability, clarifying representative payee procedures, and establishing an unfunded liabilities applicability date.
• Expand the eligibility requirement for the city members on the Board of Trustees to include city treasurers, city financial officers, and city clerks involved with financial matters.
• Increase the benefit for service beyond 22 years, up to eight additional years, from .6 percent to 1.5 percent for each additional year.
• Require the MFPRSI board to consider proposals to improve benefits to surviving spouses of retired members and present information concerning possible proposals to the Committee at the next meeting.

6. Consolidation.

Mr. Cusack presented a memorandum and chart in response to a request by Co-chairperson Mona Martin at the November 18, 1997, meeting of the Committee to investigate the issue of consolidating the State's four public employee retirement systems. Mr. Cusack stated that representatives of the four systems met on December 15, 1997, to discuss their perspectives on the purpose and implications of consolidation. Mr. Cusack noted that consolidation can seem attractive in the wake of similar efforts in the private sector and in other states with respect to retirement systems, and the perception that greater parity between systems and administrative cost savings will be achieved. It was pointed out, however, that the same degree of parity may be achieved by adjusting benefits and payouts for members among the respective systems, and that constituent input loss and governance structure variance would need to be considered. Mr. Cusack emphasized that consolidation does not solve the issue of parity and that if this issue is investigated further, the system representatives strongly favor constituent involvement in the discussions.

7. Additional Committee Discussion and Recommendation.

In addition to the recommendations noted above, the Committee recommended the following:

Pretax Contributions. The Committee recommended that employee contributions into public retirement systems be made on a pretax basis for state income tax purposes.

8. Written Materials Filed With the Legislative Service Bureau.

Materials filed at the meeting:

1. Minutes - November 18-19, 1997, meetings.
2. December 18, 1997, letter from all retirement systems concerning consolidation issues.
3. Actuarial cost studies - December 17, 1997 - IPERS.
4. Iowa Public Retirement Systems Comparison - December 18, 1997.
5. Iowa Judges Association letter - December 12, 1997.
6. Actuarial cost method letter - Towers Perrin - December 12, 1997 - MFPRSI.
7. Actuarial cost studies - December 17, 1997 - Milliman & Robertson - PORS.
8. Jim Barr's letter - PORS.
9. Peace Officer Retirement System Proposed Improvements - December 18, 1997.
10. Governor's letter - December 10, 1997.
11. Auditor of State's letter - September 18, 1997.

OTHER INFORMATION FOR THIS COMMITTEE:

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