LB30 – Municipal Pension Reform

Good afternoon, Chairman Kolterman and members of the Retirement Systems Committee.  My name is Jim Vokal and I am the CEO of the Platte Institute.

The municipal pension debt crisis could cause economic hardship on the scale of the housing bubble across the country, and has already brought major cities to their knees. From San Jose to New York, the public and elected officials, in a bipartisan fashion, have adopted pension reform – moving public employees away from defined benefit systems.

In 1983, Nebraska’s Legislature passed legislation mandating all municipalities, with the exception of Omaha and Lincoln, to move all future employees out of defined benefit pension systems.  Thankfully, because of that legislation, most municipal pension systems in Nebraska are in good standing.  This is not the case in Omaha and Lincoln.

Meaningful pension reform has met an impasse at the negotiating table in Omaha.

Omaha’s civilian employees already participate in cash balance plans, but the city’s police and fire unions have refused in negotiations to accept cash balance plans for new employees. LB30 updates Nebraska state law by including Omaha and Lincoln in municipal pension reforms from which the two major cities were excluded over 30 years ago.

Despite changes made to Omaha’s retirement systems in 2015, growing pension debt remains a considerable threat in the coming years without further reform. Changes made to benefits in 2010 and 2013 slightly reduced the growth of unfunded liabilities, but they did not fundamentally change the underlying funding policy factors that have been the drivers of the $1.99 billion in unfunded liabilities for Omaha’s Police and Fire Retirement System (PFRS) and Employees’ Retirement System (ERS).  The Reason Foundation estimates Lincoln’s pension debt at $193 million and a funding ratio of 82%.

Over the past 20 years, Omaha has seen the funded ratio of its pension plans fall precipitously from almost 100% funded, to the current situation of being less than half funded. Since 2001, the city has missed its required contribution payment every year – with the exception of 2015 for PFRS.  Collectively, since 1994, the city has paid only 73% of the required contribution for PFRS and 62% for ERS.

Omaha’s pension plans assume investment returns of 8% per year.  But both the PFRS and ERS for Omaha have been underperforming their long-term assumed rates of return.

In 2015, the plans earned just 0.2% and 3.1%, respectively. Whether a near or long-term outlook, the average annual returns for Omaha’s pension systems are far less than expected, more than 3% below the assumed 8% return over 15-year averages.  If actual returns continue to be lower than the assumed returns, the unfunded liability for the city will continue to grow, increasing the taxpayer risk by hundreds of millions each year.

For its most recent year, Lincoln also had one of the worst rates of return in the country at a negative 2.76%.

In Omaha, the ever-increasing employer contributions required to pay for pension debt will almost certainly crowd out the city’s capacity to finance other public services such as public safety, road repairs and snow removal. Because of the unfunded liabilities, Omaha has seen annual taxpayer contributions to the pension plans increase from $17.7 million in 2005 to $42.1 million in 2015.  Omaha has also had its bond rating downgraded specifically due to the uncertainty of the growing unfunded pension liability.

I sat on the Omaha City Council for 8 years and fought for reforms that could have prevented these outcomes, but the city no longer has a way to stop the bleeding on its own.

Some opponents will say we should trust in a 20 year plan to take care of the problem, but we can’t count on that.  Even if their math were right, elected officials come and go.  Other bad contracts can undo any progress city administrations make.  The only sustainable solution is to cap the pension debt by creating a new system for newly-hired workers.

If taxpayers in Nebraska’s two largest cities are going to be protected from a future of paying even higher taxes for fewer public services, and further bond rating downgrades, then the Legislature must now demand Omaha and Lincoln have the same pension requirements most other Nebraska cities have had since the 1980s.

Cash balance and defined-contribution pension systems, with their proper accounting and investment assumptions, have helped the other municipalities to avoid major pension debts.  Assuring these standards for good financial stewardship in our cities was the Legislature’s responsibility in 1983, and that responsibility still exists today.

I’d be happy to answer any questions.