Bills would switch retirement plans for certain public employees

The Nebraska Retirement Systems Committee heard testimony Jan. 31 on two bills that would switch retirement plans of school employees, state patrol officers and judges from a defined benefit to a cash benefit plan.

LB638, introduced by Omaha Sen. John Nelson, would create a cash balance benefit plan for school employees hired after July 1, 2014. Currently, school employees participate in a defined benefit plan.

Under the defined benefit pension plan, the employer promises a specified monthly benefit upon retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns.

Under the cash balance plan, each day participants are guaranteed an interest credit rate that is the greater of 5 percent, or the applicable federal mid-term rate plus 1.5 percent. The member contribution is unspecified, with a school district match of 101 percent.

Nelson said the state is facing considerable funding challenges for pensions and must implement fundamental reforms to be sustainable in the future. Currently, he said, the state has an excess of $2 billion in unfunded liabilities.

A cash balance benefit plan would allow agencies to offer higher salaries up front and attract more qualified employees, Nelson said.

No one testified in support of the bill.

Jason Hayes, a member of the Nebraska State Education Association, testified in opposition to the bill, saying the defined benefit plan recognizes employee longevity.

“The longer employees work for a district, the greater the benefit they receive,” he said. “Switching to a cash balance benefit plan is a significant move that eliminates a longstanding recruiting tool for schools.”

John Jensen, a retired teacher, also testified in opposition to the bill. He said a 5 percent return would not provide adequate benefits upon retirement.

“It would put Nebraska school districts at a disadvantage when they are trying to recruit new teachers,” he said. “If you add a weak retirement plan to the fact that [the state] is not paying its teachers well, we will loose a lot of qualified teachers to other states.”

Phyllis Chambers, director of the Nebraska Public Employees Retirement Systems, testified in a neutral capacity. She questioned how a cash balance plan would be funded as the plan ages and more retirees begin collecting pensions. In such cases, she said, agencies would need to find alternative funding sources.

Nelson also introduced LB639, which also would switch state patrol officers and judges employed after July 1, 2014 from a defined benefit plan to a cash balance plan.

No one testified in support of the bill.

Nebraska State Bar Association President Marsha Fangmeyer testified in opposition to the bill, saying that switching plans for newly appointed judges would create two separate systems for the same job.
“If the bill passes, it may set a precedent for changing other parts of benefit packages for newly appointed judges,” she said. “We oppose the idea that judges working side by side would be compensated differently.”

Steve Burns, member of the Nebraska District Judges Association, also testified in opposition, saying that judges typically are appointed when they are older and have more law experience.

Switching careers at an older age is a tough adjustment, he said, so having a reliable retirement plan makes a career change more assuring. That confidence would be “eroded” by switching plans, Burns added.

The committee took no immediate action on either LB638 or LB639.