The Municipal Police and Fire Retirement System of Iowa (MPFRSI) was created by the Iowa legislature in 1990. Its membership includes all police and firefighters from the state’s largest 49 cities. Locally, these cities include Ankeny, Des Moines, Urbandale and West Des Moines, and the Clive and Indianola police departments. It is a defined benefit plan, meaning that benefits are guaranteed regardless of what happens to the investment portfolio.
MPFRSI is governed by a 9-member Board of Directors. Four of the members are police or firefighters (active or retired) appointed by the police and fire associations; four are representatives of cities, appointed by the League of Cities; and the ninth member is chosen by the other eight members.
Members with four or more years of service are entitled to benefits starting at age 55. Benefits are determined based on the average of the highest three years of compensation, times a percentage that increases with years of service. At the top end, a 55-year-old with 30 years of service would earn 82 percent of the average of the highest three years’ salary, for life. An employee with 22 years of service would receive 66 percent. Employees with fewer than 22 years of service receive partial benefits based on a ratio of years completed to years required (22 years).
Benefits are automatically escalated by 1.5 percent per year.
Contributions to the system are 9.4% for employees. The cities’ contribution rate is determined based on the actuarial needs of the system. If investment performance declines, the cities’ rate must go up. There is, however, a minimum 17 percent contribution required by law. Starting July 1, 2012, cities will be contributing 26.12% of salary.
Employees in these systems do not pay social security, which would otherwise be another 6.2 percent.
Because cities absorb 100 percent of any required increase in contribution, recent market losses in the investment portfolio have prompted huge budget impacts from pensions. Cities have responded by raising taxes and/or cutting services. For example, the City of Des Moines has had to close libraries one day per week, eliminate a fire/EMS unit, and raise taxes in order to come up with its $2 million increase for pensions just for this year. Such “crowding out” effects are prompting questions about the fairness and sustainability of such a system.
Systems across the country are making changes. These changes include eliminating automatic escalators, capping benefits to a percentage of state median income, shifting new employees into defined contribution plans, and more equitable sharing of required increases in contributions. Adjustments in governance have also been made to increase Board representation by individuals with financial expertise and without conflicts of interest. Earlier changes in Iowa and other states have already addressed some of the more egregious issues such as inflating salaries during the last years of service in order to increase pension benefits.
In years past, the idea of making changes to a police and fire retirement plan was dismissed out of hand. No elected official wants to come across as being unsupportive of police and fire personnel. Recently, however, the public is beginning to make the connection between service cuts and pension increases. Under closer examination, they see that many retired personnel are earning more in retirement than is being earned by full-time workers. What was once unthinkable is becoming a legitimate topic of discussion among persons all across the political spectrum. In fact, some of the most recent pension reform initiatives have been led by Democrats such as Rhode Island state Treasurer Gina Raimondo, New York Gov. Mario Cuomo and San Jose Mayor Chuck Reed.
What are some policy options in Iowa?
In the long term the system needs to be changed to a defined contribution plan for new employees. Near-term options are as follows:
(1) Eliminate the automatic escalator and change it to a gain-sharing system similar to IPERS where increases are given when there is capacity in the system.
(2) Change the governance structure to increase the presence of persons with financial expertise and without conflicts of interest. In fact, such members should comprise a majority of the Board. In order to move away from conflicts of interest, these members would need to be public members appointed by the Governor or by professional associations. Alternatively the system could have two Boards with the benefits side being advisory only, as is the case with IPERS.
(3) As is already the case with IPERS, the employer and employee should share in any required increase in contribution on a 60/40 basis. It is non-sustainable and probably not reasonable to expect taxpayers to cover such a loss when most have already lost value in their own retirement plans.