LINCOLN — Teachers in Omaha and elsewhere in the state will pay a little more toward retirement, and the state will contribute more, as part of a legislative solution to a state pension shortfall advanced Thursday.
The economic downturn that began in 2008 left Nebraska with a $108 million shortfall in the state pension plans for Omaha teachers and teachers statewide.
Thursday, state lawmakers gave initial approval to a measure that would close that gap, Legislative Bill 553.
The 33-0 vote came after State Sen. Jeremy Nordquist of Omaha, chairman of the Legislature's Retirement Systems Committee, answered several concerns from colleagues about the sustainability of the plan.
Senators questioned whether Nebraska ought to consider moving away from a defined benefit pension plan for teachers.
Defined benefit plans are similar to Social Security, in that they ensure a constant benefit upon retirement. Employers, as well as employees, might have to adjust their contributions if investment returns are inadequate to maintain benefits.
Defined contribution plans, meanwhile, are similar to 401(k) plans. Retirees get only what the return is on their pension investments; less if the investments do poorly and more if they do well.
Nordquist said that switching to a defined contribution plan or a hybrid “cash balance” plan would cost the state many more millions of dollars than LB 553.
A switch, he said, would leave the state with a huge pension liability because new employees would no longer contribute to maintain fund balances for those on the defined benefit pension plan.
Omaha Sen. Heath Mello, who is chairman of the budget-writing Appropriations Committee and sits on the Retirement Committee, said switching plans would require a one-time allocation of from $400 million to $500 million.
“We don't have the money to do that. It's not fiscally responsible, and it's not a fiscal reality.”
LB 553 was merged with LB 554, a bill dealing with the Omaha teachers pension plan. LB 553 requires:
» All school employees would continue to contribute 9.78 percent of their pay toward retirement. That figure had been scheduled to drop to 7.28 percent, the rate prior to 2011. It was increased to address a short-term funding problem raised by the recession.
» School districts will continue to contribute 101 percent of what employees contribute.
» The state would increase its contribution from 1 percent of compensation to 2 percent, which translates to about $20 million more a year.
» Future teachers' cost-of-living increases would be capped at 1 percent. For current teachers, the rate is 2.5 percent. Future teachers' pension checks would use five years' of wages to compute a final average salary, rather than three. That change will reduce benefits.
» Employees would have to work 20 hours a week, instead of the current 15 hours, to qualify for the pension plan.
Nordquist said that a good pension plan helps retain quality teachers and that in recent years, teachers and school districts have contributed 90 percent of the funds to shore up the plan.
Now, the senator said, it's the state's turn.
“Everyone steps up,” he said, under LB 533.
Columbus Sen. Paul Schumacher questioned whether the assumption of an 8 percent annual return on investments was realistic, given the recent economic downturn.
He also asked whether lawmakers would have to patch up the pension system again in a couple of years.
“This is just the leading edge of a massive problem,” Schumacher said. “Baby boomers, grab your behinds, because this is going to be a rough ride.”
Nordquist said he understood the senator's concern but said the state must operate on the best assumptions it can.
He noted that a state investment board is weighing whether to lower the assumption from 8 percent.
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