LINCOLN — An Omaha-based think tank said Monday the State of Nebraska and the City of Omaha are underestimating their pension liabilities.
The Platte Institute, in a report released Monday, also said the state and city should more seriously consider switching to retirement plans predominately used in the private sector.
According to the report, it's unreasonable for public pension plans to assume an 8-percent rate of return when many economists project lower returns in the future.
If the state adopted a more realistic assumption, the institute report said, the state and Omaha would face much higher bills for funding the defined benefit pensions now given to police officers and firefighters, K-12 school employees, state troopers and judges.
The state and City of Omaha also should give serious consideration to switching to defined contribution plans, said Jim Vokal of the Platte Institute. Such plans, similar to 401(k) plans, don't guarantee a certain pension payment but are based on how much an employee contributes and how well the investments perform.
Vokal pointed out that fewer than 5 percent of private companies still offer defined benefit plans, like those offered by the city and state, which guarantee a certain pension regardless of how investments perform.
“It doesn't make any fiscal sense,” he said.
The report was released less than a week after the Nebraska Legislature overrode Gov. Dave Heineman's veto of a bill that alters contributions to pension plans for Omaha teachers and school employees across the state.
Legislative Bill 553 would erase unfunded liabilities in the teacher plans, according to fiscal projections. Its passage prompted the state's teachers union to erect a huge “thanks” sign on the side of its building, which faces the State Capitol.
Under the bill, new teachers will accept slightly lower retirement benefits and a lower, 1 percent annual cost of living adjustment. But new and current teachers would pay a slightly higher contribution, 9.78 percent of wages, toward retirement, and school districts and the state would also increase their contributions.
The state's contribution would double, from 1 percent of school employee salaries to 2 percent, costing an additional $20 million a year.
Heineman harshly criticized the bill in his veto message, saying it didn't adequately address the long-term issues involved in continuing the defined benefit plans.
Phyllis Chambers, director of the Nebraska Public Employees Retirement Systems, said the state's retirement board is looking at adjusting the projected rate of return for its defined benefit plans from 8 percent to 7.75 percent but is waiting for year-end results on June 30. A new actuary, who recommends whether to adjust the rate of return, is coming on board at that time.
Chambers noted the state's average rate of return since 1984 has been about 9 percent, though the rate over the past decade has been 6.5 percent due to recession. So far this year, the state's pension investments have returned 12.4 percent, she added. Most states still use an 8 percent assumption.
“Obviously, the big question is what will happen going forward,” Chambers said. “It's a very complex issue.”
The Platte Institute report was authored by Andrew Biggs, a scholar with the American Enterprise Institute, a conservative group based in Washington, D.C.
It said a “fair market” approach to establishing pension liabilities would be more realistic. If that was applied, the report stated that Omaha's police and fire pension plan would be only 25 percent funded, instead of the 43 percent now projected. The city's unfunded pension liability, under the report's projections, would rise to $1.4 billion.
The state's teacher pension plan would be 43 percent funded under the fair market method, and the unfunded pension gap would be $9.5 billion, the report stated. The state's current assumptions show the plan is 77 percent funded, though that gap is projected to be eliminated with the passage of LB 553.
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