Donna Mueller was appointed CEO of the Iowa Public Employees’ Retirement System by the governor in 2003 and was most recently reconfirmed in March 2012. Prior to joining IPERS, she was the Boston city retirement director, and earlier in her career was a special assistant corporation counsel with the city of Boston. She has a law degree from Washington and Lee University and is also a graduate of the John F. Kennedy School of Government’s Program for Senior Executives at Harvard University. 

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When Donna Mueller moved to Iowa to lead the Iowa Public Employees’ Retirement System in 2003, she quickly learned that Iowa’s largest public pension system was familiar to most people. 

“They’d stop me (from explaining it) and say, ‘I know, I know — my mother’s in it’ or ‘My sister’s in it’ or ‘I still have an account,’ ‘’ Mueller said. 

About one in every 10 Iowans is touched by IPERS, either as an active member paying into the system or as a retiree receiving benefits. In addition to state employees, the $28 billion retirement trust fund also serves workers in Iowa city and county governments, school districts, and law enforcement and fire departments. 

A pre-funded pension system, IPERS pools contributions from government agencies and employees to invest them over the life of each member. The average IPERS member retires after 22 years of service and receives a lifetime annual pension of $16,000. In the past fiscal year, the system paid out $1.8 billion to retirees, with about 70 percent of that coming from investment earnings. 

Like many public pension systems in the past decade, IPERS experienced a growing unfunded liability that was magnified by investment losses during the Great Recession in 2008-09. 

The past fiscal year was a significant milestone for IPERS, as it marked the first full year in more than a decade in which it collected the actuarially determined contribution rates needed to return the trust fund to fully funded within the next three decades. 
Market turmoil 

When the stock market takes a tumble as it did in September, it typically doesn’t spark any sudden course corrections in IPERS’ investment strategies, Mueller said. 

“We don’t immediately change direction, because we have to take into account that we’re a long-term investor,” she said. “As the actuaries always remind me, our liabilities go out 30 to 50 years, so we take a very long-range view of the market. That doesn’t mean that we’re not concerned about current gyrations in the markets.” 

Mueller noted that the recession of 2008-09 really brought into focus the need to better diversify the investment portfolios for potential risk. “With that in mind, we have been, for a good number of years, further diversifying,” she said. 

Market losses during the 2008-09 recession as well as the earlier downturn of 2001-03 compounded IPERS’ unfunded liability — the deficit between what it actually collected from members compared with what it should have been collecting based on actuarial calculations. Members’  contribution rate had last been set by the Iowa Legislature in 1979. 

“When the downturn of 2008 came about, we had a decade of underpayment of contribution rates, and then another extreme downturn, so it really had a compounded effect upon the shortfall,” Mueller said. “Also in 2000, the mortality tables were updated, which provided kind of a double whammy (to the shortfall). 

Shrinking the shortfall 

The funding shortfall reached its peak in fiscal year 2012 at $5.916 billion, meaning that the IPERS trust fund was 79.9 percent funded.  

Under a pension reform bill enacted by the Legislature in 2010, IPERS was allowed to adjust the member contribution rates to an actuarial floating rate. The new law allows the pension system to adjust the contribution rate up or down by no more than 1 percentage point per year. IPERS has increased the contribution rate each year since then through fiscal 2014 and will not reduce the contribution rate until the fund is 95 percent funded, Mueller said. 

With the policy changes, IPERS also began setting aside a portion of member contributions to pay off the unfunded liability within 30 years, similar to a 30-year mortgage. At the end of fiscal 2014 that ended June 30, 2014, IPERS was 82.7 percent funded, after reducing the shortfall by approximately $674 million. 

“I would say the investment board did a great job of bringing together a funding policy to bring this organization to full funding in 30 years,” Mueller said. 

Not all IPERS members have experienced increases in their contribution rates, however. IPERS’ two special service groups — “sheriffs and deputies” and “protection occupations” — were 94.8 percent and 100 percent funded, respectively, so the contribution rate has actually been reduced by a half percentage point for fiscal 2016 for the latter group. 

Investment trends 

In 2013, IPERS seized upon an investment opportunity that a number of public pension funds observed in the post-recession lending landscape for commercial real estate. 

“We noticed an opportunity following the recession that there were many prime properties that were still coming up for refinancing, but there was a market there the banks weren’t filling,” Mueller said. Two years later, those investments are performing as expected, she said. 

IPERS had already been in real estate investments; in addition to real estate investment trusts, it also owns properties through limited liability corporations. Interestingly enough, IPERS also owns its own 45,000-square-foot building at 7401 Register Drive that houses its 79-person staff, though the building is considered a capital asset, not part of its real estate investment portfolio. 

Additionally, for many years, IPERS has been invested in high-yield bonds, but with a conservative investment approach. “We demand of our investment managers that they have a higher grade of high-yield portfolio for us,” Mueller said. “In periods when people are really going after risk, you may see the high-yield index make some gains only to be followed by dives as people run from risk. Our portfolio is more steady because it stays in the higher credit rating area.” 

IPERS’ investment board has recently discussed middle-market debt financing as a new investment opportunity, Mueller said. 

“Once again, there is a large opportunity there for businesses that are good debt risk but aren’t getting financing or refinancing at the banks,” she said. “So we are looking at that as well; that would be in what we call the credit opportunity bucket.” 

Additionally, Mueller said that the investment board has been paying more attention recently to “alpha,” the return on investments through active management to beat benchmarks. 

“I think everyone found with the 2008 recession, what we thought was good diversification almost all (turned out to be) correlated, even when the traditional theory said it shouldn’t be so correlated,” she said. “So I think we’ve all learned a lot from that to look a little deeper as to correlations.”

Growing pool of retirees 

With about 108,000 retirees drawing benefits and about 165,000 active members contributing, IPERS is at an all-time high for its pool of retirees. 

The ratio of active members to retirees is about 1.54 to 1, and that ratio has been steadily decreasing, Mueller said. 

“We’re not a pay-as-you-go system, so that doesn’t cause me concern,” she said. “What it does indicate is it’s additional work on a cash-flow basis when you come into a volatile period like we’re in now. It means you have to have more management on your cash flow (by holding out more earnings to pay benefits rather than reinvest).” 

Some retirees receive the lifetime benefits for quite a long time. At any given time, more than 100 retirees are over the age of 100. “Our latest count was about 137,” Mueller said. “Blessings on them.” 

Mueller said that it’s actually beneficial for members to wait until the full retirement age of 65 because they’re subject to a 3 percent reduction for each year they receive benefits early (which increases to 6 percent per year for service after July 1, 2012). It’s also to IPERS’ advantage, because when members wait until their full retirement age to draw benefits, it helps reduce the overall funding shortfall, she said. “So it’s better for the member and better for the system too.” 

Looking back at the past year, getting back on track to collecting actuarially determined contribution rates was a significant milestone, Mueller said. “Going forward, the challenges will really be to see how well that funding policy works through market turmoil,” she said. 

Additionally, financial stress tests that were completed under newly required Governmental Accounting Standards Board regulations showed that the investment return assumption of 7.5 percent for IPERS’ portfolio is reasonable. 

“That was a relief to see on that testing,” she said. “You want to have downside protection, without taking too much off the growth.” 

For more information on IPERS, read Taxpayers Association of Central Iowa President Gretchen Tegeler’s analysis of IPERS retirements on page 20.

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State pension shortfalls a national challenge

The nation’s state-run retirement systems were short a total of $968 billion in 2013. That’s the difference between pension benefits that governments have promised to their workers and the funding available to meet those obligations, according to a report by the Pew Charitable Trusts. That’s $54 billion greater than the gap in the previous year, according to the report. 

State and local policymakers cannot count on investment returns over the long term to close this gap and instead need to put in place funding policies that put them on track to pay down pension debt, according to the report, “The State Pensions Funding Gap: Challenges Persist.” 

In 2013, state pension contributions totaled $74 billion — $18 billion short of what was needed to meet the actuarial required contribution (ARC) needed for full funding. Only 24 states were setting aside at least 95 percent of the ARC they determined for themselves. Overall, states that contributed at least 95 percent of the ARC from 2003 to 2013 had retirement systems that were 75 percent funded, while those that hadn’t were funded at 68 percent.