Special Report: Taxpayers to be Saddled with Growing Omaha Pension Debt
Every Omaha taxpayer and resident should be concerned about the City of Omaha’s new report that highlights the growing pension debt problem in city’s police and fire retirement system.
Pension debt is an IOU by taxpayers to pay for retirement benefits because of previous bad choices by policymakers.
Pension debts accrue when governments promise public employees a certain level of retirement benefits, and then either do not make needed contributions to the pension system, or the pension system’s investments do not perform well enough to meet those obligations. In Omaha’s case, both have occurred, leaving taxpayers contributing $42 million last year to Omaha’s police and fire pension fund. That’s an increase of more than $25 million from ten years ago.
Funding the liabilities of the city’s pension system crowds funding for other city services out of the budget.
That means as the city’s pension debt grows, fewer of the dollars residents pay in taxes actually fund the services they expect from local government. It also means Omahans could face tax increases down the road. We have already seen this play out in Chicago, where property tax increases were levied in order to pay for unfunded pension obligations.
Unfunded pension debt can also result in a lower bond rating, as was seen in 2013 and 2014 when the City of Omaha was stripped of its AAA General Obligation Bond Rating by Moody’s Investor Services and Standard & Poors (S&P). In both cases, the rating agencies indicated that unfunded pension liabilities were the primary reason for reducing the ratings. If the city cannot borrow at a reasonable rate, major projects are either not undertaken or the city must find alternate ways to finance the projects, whether by cutting spending or increasing taxes.
The latest actuarial valuation report for the Omaha police and fire pension system reveals a troubled pension plan that is saddling taxpayers with an increasing level of debt, and the problem will continue to get worse.
According to the report, the police and fire retirement system alone boasts an unfunded liability of $603 million. However, if the Omaha police and fire pension plan used the same market values legally required of private sector defined benefit pensions when determining contribution rates, the public would be aware that the true unfunded liability is much closer to $1 billion.
Omaha’s ever-growing pension debt can be attributed in part to mismanagement, but just as importantly, to a defined benefit pension system that is fundamentally based on inaccurate actuarial assumptions. According to the report, only about 50 cents is saved for every dollar in pension benefits promised. Underfunding the pension system not only means failing to save enough to cover current pension obligations, it also undercuts the investment returns used to help pay for future benefits.
Supporters of the current system claim the plan is now sufficiently reformed because the city is finally making its required contributions after decades of neglect. But that change does not reverse the damage that has already been done. It also does not account for the retirement system’s poor investment performance.
Omaha’s police and fire pension system can only be fulfilled without growing pension debts if the plan’s assets yield an annual investment return of 8 percent; however, the plan earned a mere .02 percent return last year, adding tens of millions to the pension debts taxpayers will need to fund.
Unfortunately, this is not an isolated incident. Investment returns have been so poor in recent years the plan would need to earn more than 13 percent next year in order to average a long-run return of 8 percent. Using the last 30 years of data, it is highly unlikely the plan will earn an average investment return of 8 percent in the coming years, resulting in pension debt that will only continue to grow.
Pension debt is not a problem unique to Omaha or Nebraska. Many experts consider the state of public pensions to be as great of an economic danger to the country as the housing bubble was during the Great Recession. The difference is that other cities and states are recognizing what they stand to lose by ignoring their troubled public defined benefit pension plans.
When Arizona’s statewide police and fire pension system became only 50 percent funded last year, as Omaha’s system is now, it was considered a wake-up call for politicians and unions alike. The Arizona legislature crafted a bipartisan reform plan that was approved earlier this year.
Without similar action in Omaha, the public’s priorities will be crowded out of the city budget. Officials in Omaha have set ambitious goals of working to lower property tax rates while making investments in roads and hiring more public safety workers. Growing pension debts threaten to stall those efforts for today’s residents and generations of Omahans to come.