News Release: Omaha City Council May Play Politics with Pension Debt

NEWS RELEASE from the Platte Institute

 Omaha Pension Debt Report – Working Copy

Contact: Adam Weinberg
(402) 452-3737
aweinberg@platteinstitute.org

Omaha City Council May Choose Election Politics Over Taxpayers
City Resolution Opposes Reform of Nearly $2 Billion Pension Debt

OMAHA, NE (January 9, 2016) — 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.

But with city campaign season upon us, some members of the Omaha City Council intend to play politics with Omaha’s nearly $2 billion pension debt instead of supporting badly-needed pension reform. A resolution expected to be introduced Tuesday by City Councilman Chris Jerram would declare the city council opposed to Legislative Bill 30, a state legislative bill that would cap the current trajectory of Omaha and Lincoln’s growing pension debts. LB30 calls for new public safety workers in Omaha and Lincoln to be enrolled in a cash balance pension plan.

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, which would move away from the current defined benefit pension model. 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.

“Meaningful pension reform has met an impasse at the negotiating table in Omaha. If Omaha’s taxpayers are going to be protected from a future of paying even higher taxes for fewer public services, then the Legislature must now demand the city have the same pension requirements most other Nebraska cities have had since the 1980s, which have helped them to avoid major pension debts,” said Jim Vokal, Chief Executive Officer of the Platte Institute.

City Council member Aimee Melton has announced her intention to oppose the resolution in Tuesday’s City Council meeting.

“Cities all over the country are going bankrupt because of out-of-control pension debts. I don’t want to see that happen here in Omaha,” said City Council member Aimee Melton. “This resolution might make good election season angling for union votes, but it’s terrible policy for Omaha’s economic future and for taxpayers,” said Melton.

The latest information on Omaha’s pension debt is the subject of an upcoming report by the Reason Foundation that is being published by the Platte Institute.

A working copy of that report, Pension Debt: The Billion Dollar Problem Still Threatening Omaha, is attached in PDF format.

Here are excerpts from the Platte Institute/Reason Foundation report:

• 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);
   
• There are three underlying causes for Omaha’s growing pension debt. The two most prominent causes of growth in the unfunded liability are (1) the city not paying the full actuarially determined employer contribution to the pension systems and (2) underperforming the assumed investment returns. The third largest contributor is (3) the undervaluing the amount of all promised future benefits to employees by using a discount rate that is too high;
   
• 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’s, and 62% of ERS’s required contribution. This has resulted in a combined funded ratio of 29.3% for the plans;
   
• Both the PFRS and ERS have been underperforming their 8% long-term assumed rates of return. Omaha’s pension plans assume investment returns of 8% per year.  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;
   
• Ever-increasing employer contributions would almost certainly crowd out Omaha’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; 
   
• If done correctly, pension reform for Omaha needs two additional steps to the reform already enacted. First, city officials need to finish the project of capping the growth of liabilities exposed to volatility and significant risk. This can be done by moving future employees into a cash balance or defined contribution plan. Second, Omaha needs to ensure the funding policy for existing liabilities does not remain a threat to the city’s budget, given the aggressively optimistic actuarial assumptions currently being used by the plans. 
   

To schedule an interview about this report, please contact Adam Weinberg at (402) 452-3737 or aweinberg@platteinstitute.org. 

The Platte Institute advances policies that remove barriers to growth and opportunity in Nebraska. Learn more at PlatteInstitute.org.