When pension experts point to state and local pension systems that are “doing it right,” Nebraska’s pension plans are almost always included. That’s because the state and county systems transitioned to cash-balance plans in 2003. And then you have the Omaha and Lincoln police and fire pension plans, both outdated and expensive defined benefit plans, and both in financial straits.
This week, RSI Board Member Dan Liljenquist and RSI Executive Director Pete Constant testified before Nebraska Legislature’s Retirement Systems Committee in support of LB30, a pension measure that would reform Omaha and Lincoln police and fire pension systems. The bill, sponsored by Committee Chairman Sen. Mark Kolterman, would transition new-hire employees from the currently-used defined benefit structure to a cash-balance retirement program.
(Refresher: a cash-balance plan is designed to provide an employee with an accumulated account balance upon retirement which the employee uses to fund his/her retirement. Employee and employer contributions are typically fixed percentages of salary. Investment gains add to the account balance and investment losses are protected by the employer’s guarantee of a minimum investment return. A defined benefit plan is designed to provide an employee with a specified amount of monthly retirement income typically based on the employee’s salary, years of work and age. The way they are typically structured, DB plans require less employer & employee contributions, instead relying on high investment returns for funding).
“The situation in Lincoln and Omaha is that they’ve been chronically underfunding their plans,” Liljenquist told committee members during the hearing. “Couple that with high assumption risks and low market returns for years and the plans are in dire straits.”
Without substantive reform offered by LB30, both systems will continue to deteriorate, jeopardizing government finances and public workers’ retirement benefits.
The Omaha Police and Fire public pension system is roughly $630 million in debt and Lincoln’s Police and Fire pension fund is an estimated $190 million in debt. “The structure of the plans and the new normal of what the markets are doing make it very expensive,” Liljenquist said.
Neither the Lincoln nor the Omaha pension plans have kept up with funding levels to keep them sustainable (Omaha is funded at roughly 50 percent, Lincoln at 80 percent), instead relying on high assumed market returns. In Lincoln, the average rate of return for the past 15 years has been 5.2 percent, compared to its 7.5 percent assumed return. During the same time, Omaha has been guaranteeing 8 percent returns, while average actual returns have been only 4.8 percent. To help make up for the difference both cities have continually poured taxpayer dollars into the systems. In 2016, the city of Omaha contributed an exorbitant 33 percent toward its plan; in comparison, under their cash-balance plans, the state contributes 7.48 percent and counties contribute 6.75 percent.
“Pumping more money into a system is not a plan, it’s triage,” said Liljenquist. “It’s like stumbling across a chemical spill in your backyard. First you have to cap that spill and then work overtime to clean it up. LB30 does that.”
LB30 would transition new hire employees from the current defined benefit structure to a cash-balance program that uses lower assumed return rates and cuts future risk in half. The reform would not affect current employees and retirees. Adopting the cash-balance plan for new employees would help ensure that retirement promises that were made to current employees and retirees can be kept.
"For Lincoln and Omaha to honor the promises made to their active police officers and firefighters and retirees, reform of some sort must happen,” Constant told committee members. “If they want to be able to recruit from the millennial generation and Gen Z, pension portability and sustainability are essential.”
According to Constant, neither the Lincoln nor Omaha pension systems, as they are currently structured, are sustainable and leave employees and retirees vulnerable to retirement insecurity.
“The plans have significant funding problems,” he said. “When pension plans hit a funding ratio like Lincoln’s and Omaha’s and carry significant debt, taking no action threatens their very solvency.”
For more information on the pension crisis facing Lincoln and Omaha, click here for in-depth analysis by the Platte Institute and Reason Foundation.