Legislative Testimony for LB586: Require an annual report regarding police and firefighter retirement plans in certain cities
Good afternoon, Chairman Kolterman and members of the Retirement Committee. My name is Sarah Curry, Policy Director at the Platte Institute, and I am testifying in support of LB586.
In 1983, the Nebraska Legislature mandated all municipalities, with the exception of Omaha and Lincoln, to move 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 and we now see the effects of those exclusions.
Since 2000, Omaha’s two public pension plans and Lincoln’s public safety plan have seen their unfunded liabilities grow and now these three plans have total debts approaching $1 billion.
Omaha made changes to benefits in 2010 and 2013. In 2015 Omaha’s civilian plan established a cash balance plan for all new members and in 2018, the city increased contributions from both employees and employers for their public safety plan. Despite these changes, both Omaha plans combined have nearly $900 million in unfunded liabilities with funding ratios around 50%. However, it should be noted that Omaha’s civilian plan can be changed in the future contractually.
Lincoln has also taken steps to address their growing pension problem. In 2017, the city passed an ordinance requiring the budget to pay the full actuarially determined cost. In 2019, the plan slightly decreased its investment return assumption. Despite these changes, Lincoln’s plan reported a 78% funded ratio in 2019, which is one of the lowest in the nation.
It is clear more needs to be done to keep future pension liabilities from growing, which is why LB586 is such a valuable contribution to the pension discussion in Nebraska.
Every year actuaries evaluate and issue a report for each of the Omaha and Lincoln plans. However, these reports are not considered “stress tests.” LB586 will create a new annual report on these municipal plans that will evaluate how they would respond to a variety of potential scenarios, allowing this committee along with leaders in Omaha and Lincoln to gauge the effects of hypothetical adverse market conditions on these retirement systems. Essentially, this new report would provide a risk assessment.
The idea of stress testing is not new. In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required large financial institutions to conduct stress tests. This idea has been passed down to state government and over the last ten years we have seen state-level mandates to stress test public pensions catching popularity across the country.
Starting in 2010 with California, 16 states have enacted stress testing requirements of their public retirement systems: Arkansas, California, Colorado, Connecticut, Hawaii, Indiana, Maryland, Minnesota, Montana, New Jersey, North Carolina, Pennsylvania, Vermont, Virginia, and Washington. We would like to add Nebraska to this list.
Multiple industry, legislative, and policy groups have also supported the idea of stress testing public pension plans. In 2018, the American Actuaries’ Actuarial Standards Board (ASB) adopted a new actuarial standard (ASOP 51) which expands the risk assessment responsibilities of pension actuaries.
Other supporters of public pension stress tests are The National Association of State Legislatures (NCSL), Pew Charitable Trusts, the National Association of State Retirement Administrators, and Governing Magazine. Even Harvard’s Kennedy School for Business and Government has concluded through empirical analysis that “stress testing is not just an academic exercise, and (they) recommend that it be a standard reporting practice for all public-sector retirement systems.”[i]
To protect taxpayers, employees, and retirees, we ask this committee to advance LB586 to General File. With modern technology, stress testing is easy, cost-effective, and well-worth the effort given the information it equips policymakers with.
Thank you and I’m happy to take any questions.
[i] Mennis, G., Banta, S., & Draine, D. (2018, May). Assessing the risk of fiscal distress for public pensions: State stress test analysis. Harvard Kennedy School Mossavar-Rahmani Center for Business and Government Associate Working Paper Series No. 92. https://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp92