Public works employees in Des Moines, Iowa, pave asphalt. Most employees of the city are automatically enrolled in the Iowa Public Employee’s Retirement System, through which both employee and employer contribute a set percentage of the employee’s wages toward the funds the employee will receive upon retiring.

Rising pension costs have been catching headlines from New York, where there’s a lack of funding, to states like California — most notably Stockton — where there are talks of bankruptcy.

Numerous factors led to the crisis including the recession, a slow recovery, longer life expectancies, lower returns on investments, inadequate funding of liabilities, increases in benefits without funding them and questionable practices like pension spiking. States, counties and municipalities can no longer ignore the issue, and they’re considering reforms, cutting costs or raising taxes in an effort to stem disaster.

A few states and municipalities, however, have achieved stability in spite of the challenges. Milwaukee, Wis., for example, has managed to build a fully-funded pension system. The state of Iowa has found a way to remain secure and recover most of its recession losses.

Milwaukee, Wis.

The city of Milwaukee’s Employes’ Retirement System is fully funded, with 104.9 percent covered on an actuarial basis as of the latest independent actuarial valuation in 2011. According to Executive Director Jerry Allen, Milwaukee’s ERS health comes from good practices — from governance to regulations that prevent pension spiking.

“The city of Milwaukee institutionalized pension funding discipline many years ago by ‘hardwiring’ funding requirements in the city charter,” Allen said in a statement. “Payments of actuarially required contributions determined annually by an independent actuary are mandated by the charter, which requires a super majority of the city council to amend. In addition, member contributions are paid into the pension trust each pay day.”

The chart illustrates the city of Milwaukee’s Employes’ Retirement System’s long-term investment returns from 1978 by showing 20-year rolling returns. CMERS’ focus is on long-term investment performance, since they are strategic institutional investors who aim to fulfill an obligation that retirees receive a lifetime stream of pension payments. They use 20-year rolling return periods to smooth out short-term “noise” in return data so long-term “signals” or trends are more discernible.

Allen noted that pension benefits are kept modest, at approximately $23,000 on average, for current retires. Pensionable wages also do not include overtime, which prevents a practice that has plagued many municipalities, called pension “spiking.” Milwaukee’s pension system is delegated to an independent pension and annuity board, which includes four elected trustees from among employees and retirees, as well as three trustees appointed by the president of the common council and one exofficio trustee, the independently-elected city comptroller. This is according to state law and charter ordinance.

Despite having a fully-funded program, Allen said that Milwaukee still faces significant challenges, which can be grouped into three categories: economic, which is the result of volatile markets; demographic, a result of increased life expectancies; and political.

“The current state budget requires the state pension system to conduct a study to consider a defined contribution plan, similar to a 401(k) plan, alternative to the current state pension plan,” Allen said of the political challenges. “Although the city of Milwaukee Employes’ Retirement System is independent of the state system, the substitution of a 401(k)-style plan would be a game changer in our state.”

To address the challenges, the common council created a task force to identify alternatives to the current plan design that would apply to new hires. The task force will submit their report in June. Another step that happened prior to Wisconsin Act 10, which prohibits public employers from picking up the cost of employee contributions, the city of Milwaukee adopted requirements for new employees to have their contributions deducted from their pay.

Des Moines and Iowa

Most Iowa public employees automatically become members of Iowa Public Employees’ Retirement System when they start employment with a covered employer. Both the employee and the employer contribute a percentage of the employee’s wages, at a rate set by state ordinances. These contributions are then pooled and invested, which provides the funding for all of IPERS’ pensions. IPERS is pre-funded, meaning that contributions paid and invested during the employee’s career provide the funds for benefits the person will receive upon retirement.

The Iowa Public Employees’ Retirement System, like other pension funds, lost some money during the recession but with a trust fund at $23.1 billion it’s close to where it stood prior to the economic hard times.

According to IPERS Director of Communications Judy Akre, the current pension situation did not develop overnight. “IPER’S UAL (unfunded actuarial liability) shortfall occurred over a decades-long period of insufficient contribution combined with the recession of 2011 and the Great Recession,” Akre said in a statement.

While the fund lost some money during the economic hard times, the trust fund has grown to $23.1 billion — almost where it stood pre-recession. Funding, as of IPERS’ FY2011 report, is at 79.9 percent with a 19.9 percent return on investments and an amortization rate of 34 years. Facilitating this recovery have been pension reforms, a healthy investment return and low administrative cost.

Des Moines, Iowa Human Resource Director James Wells noted that municipalities have faced some challenges with rising costs of pensions, health care and wages. Iowa, though, was not as affected by these challenges compared to other states.

“There have been increases in cost to the city, and we have to make it up somewhere,” Wells stated, adding that it either comes from cutting costs or tax increases. Pension costs make up 12 percent of the city of Des Moines’ budget, with public employees belonging either to IPERS or to the Municipal Fire and Police Retirement System of Iowa.

“The city has reduced staff by 300,” as a result of increased costs, he said.

House File 2518, passed in 2010, has been especially pivotal in improving Iowa’s funding status and sustainability. Many of its modifications are set to take place in July, while the rest took effect in June and July of 2011. It will increase the vesting requirements, change the average salary used to calculate benefits, increase reductions on benefits for members who retire early and increase contributions. Employees will also contribute 5.38 percent, while employers will contribute 8.07 percent. Also starting in July, IPERS will have the ability to adjust the rate up or down each year, by no more than 1.0 percentage point, to meet needs.