A few months ago the Taxpayers Association of Central Iowa sponsored a visit by San Jose Mayor Chuck Reed, a Democrat who has gained national recognition for leading police and fire pension reform in one of the most liberal communities in arguably the most liberal state in the nation. We were interested in learning how he accomplished what would have once been deemed impossible – unthinkable, even — and in determining what relevance there might be for Iowa. The answer was: get the facts out.
As is happening elsewhere across the nation – and as happened in San Jose — Iowans are beginning to question why their city parks, libraries and sometimes even public safety services are being cut. They are starting to look in greater detail at some of the cost drivers that are crowding out other services in local budgets. In 49 of Iowa’s largest cities, those belonging to the Municipal Fire and Police Retirement System of Iowa (MFPRSI, aka the “411 plan”), police and fire pension costs are the most significant cost driver. This is what we have in common with San Jose: the serious impact these pension plans are having on city services.
Over the past ten years the number of members in the system hasn’t changed, but the cost of taxpayer-funded pension contributions has nearly tripled.
In the past two years, police and fire pension costs in the City of Des Moines have increased by nearly $2 million, a 20 percent increase at a time when its property tax revenue was shrinking. In order to absorb the increase, a series of service reductions and a property tax rate increase were required. The one-day-per week library closing yielded $427,000; reduced mowing and fewer trash barrels in parks $115,000; elimination of a medic squad $530,000; reduced street cleaning $325,000; the list goes on. Next year the city faces another $2.6 million increase.
In West Des Moines, citizens are starting to ask why a new fire station remains unstaffed after three years. With police and fire pension costs climbing by nearly $1 million over this time period, and projected to climb another $400,000 next year, it is difficult to see how the City will ever come up with the $600,000 that would be needed to staff the station.
Similar stories can be found in any of the 49 cities that are a part of the police and fire retirement plan. Pension costs are growing at a rate far beyond growth in revenue, necessitating budget cuts, property tax increases, or both. Cities can’t change the plan; only the state legislature can do so.
The question for taxpayers is whether it is reasonable to increasingly cut library, park, public safety and other services — and raise property taxes — in order to pay for these benefits? Especially at a time when most taxpayers have lost value in their own retirement plans (if they have them)? Or, is it time to look at an adjustment in benefits and/or a more equitable sharing of costs?
One way to gauge the reasonableness of a given plan is to compare it with other large, public pension systems in the same state. In Iowa, the best comparison is with the Iowa Public Employees Retirement System (IPERS) plan for “protection occupation” class members, i.e. police and firefighters.
On the cost side, a comprehensive analysis by the Taxpayers Association of Central Iowa shows that when all factors are considered (including differences in social security and disability), taxpayers are contributing 40 percent more for retirement and long-term disability for the police and fire employees in the 411 plan than they are for police and fire employees covered under IPERS – 39 percent vs. 28 percent of payroll. The discrepancy will grow significantly over the next few years.
Not surprisingly, there are also differences on the benefit side. Members of the 411 system can earn up to 82 percent of final pay (calculated as the average of the final three years), while IPERS special service members can earn a maximum of 72 percent. Some of the difference can be attributable to the absence of social security for most of the 411 system members. It should be noted that the maximum percentage for “regular” IPERS members (non law-enforcement) is 65 percent of final pay, with retirement eligibility at age 65 rather than age 55.
For cities, the most immediate challenge with the 411 system has to do with how funding shortfalls that arise from poor investment returns are handled. In IPERS, when increases in contribution are required to make up for such shortfalls, the increase is shared between the employer and the employee on a 60/40 basis. However, under the 411 system, cities pay 100 percent of any required increase. A 60/40 sharing in the 411 system would provide some immediate budget relief to cities, while increasing the employee contribution by two percentage points next year. Is this reasonable in order to retain such an extraordinary benefit?
More fundamentally, the State needs to start exploring how IPERS and the police and fire (411) system can move away from being 100 percent guaranteed benefit plans, a transition that has already occurred in the private sector. Thirteen states, including Kansas in 2012, have already moved in this direction, usually just for new employees. The current trend is to adopt so-called hybrid plans that consist of part defined contribution, and part defined benefits. Good models exist that protect employees while lessening the burden for taxpayers. Here in Iowa, state university employees actually have a choice between IPERS and a defined contribution plan (TIAA-CREF), and the overwhelming majority have chosen TIAA-CREF.
Because it is politically difficult for elected officials of either party to take on the task, police and fire pension reform especially will only happen when citizens begin to make the link between declines in city services and the growing cost of these pension obligations. Police and firefighters in Iowa’s largest cities are much respected and appreciated for the difficult jobs they do, but this should not exempt their retirement plan from scrutiny in a world where resources are limited and serious trade-offs are being made.
Even in the short term, it’s time for citizens to make a judgment based on the facts. Should taxpayers fund such a large share of this retirement package (retirements as early as age 55 with up to 82% of final salary guaranteed for life) when services are being cut and/or taxes raised to do so, or should employees be asked to contribute an additional two percent to help shoulder the cost? Until our state elected officials hear from taxpayers, no change is possible.