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LB 415 is one of the Retirement Committee’s Priority bills. I have said many times that I support defined benefit plans for public employees as long as they are well-funded and sustainable. In order to achieve that goal, I believe it is necessary to monitor events that cause funding impacts along the way, and to make adjustments before plans get into funding difficulties.
Funding levels can change quickly. For example, in 2014 the actuary projected that the School Plan would be 100% funded in 2019 and no actuarially required contributions (ARCs) were projected for at least 30 years. But a number of things happened since 2014 and now the School Plan is projected to not reach 100% funded status until 2040, and ARCs are projected to begin in 2020 and increase every year after that.
So what happened? Since 2014 there have been two years of low investment returns on the retirement plans — 3.9% in 2015 and 1.6% in 2016 — and an Actuarial Experience Study was conducted which resulted in two major assumption changes. Beginning July 1, 2017, the assumed investment rate will be reduced from 8% to 7.5% and a new mortality table will be used to reflect the fact that plan members are living longer. While the mortality experience is great news for our plan members, it’s expensive news for the plans. When defined benefit plan members can retire in their 50s, but mortality tables indicate they are living much longer, it means that benefits are likely to be paid over a longer period of time.
My goals in introducing this bill are to make benefit adjustments to the school plans to lower long-term funding obligations. Plan changes will also encourage school employees to work until they are truly ready to retire and limit double dipping. Changes also will ensure there are bona fide separations of service and no sham terminations, which are important changes in order to comply with IRS requirements for qualified pension plans.
I have been working with representatives of school employees, school administrators and the Nebraska Public Employees Retirement Systems for the past two years regarding many of these proposed changes. Since the bill was introduced, I have continued to meet with school groups and have agreed to compromise on some of the original provisions in the bill.
The bill was advanced from Committee with a number of changes to LB 415. As introduced, the bill proposed a Rule of 90 with a minimum retirement age of 60. This was changed to a Rule of 85 with a minimum age of 60. This means that school employees may retire with full benefits if their age and years of school service are equal to or greater than 85. The new Rule of 85 with a minimum retirement age of 60 applies only to new members and does not affect any of the current plan members. This change is responsive to the new actuarial information that employees are living longer and encourages and requires members to work and contribute to the plan in order to reduce the number of years that benefits will be paid. It also encourages members to work until they are truly ready to retire so hopefully there are fewer members who return to work and “double dip”. The actuarial analysis conducted on this benefit change indicates that this will result in a cost savings over the next 30 years of $100 million for the statewide School Plan and the Omaha School Plan.
Another major change in the school plans are new separation of service requirements. Currently, in the school plan, a 180-day break in service is required for members before they can return to work for a school district. However, there are current exemptions to this break in service – for example — members may currently return to work for a school if they provide intermittent voluntary or substitute service. Allowing intermittent substitute service has resulted many challenges trying to determine what intermittent means, and in some cases has been seriously abused or ignored. Under LB 415 these exemptions are eliminated in order to draw a bright line about what constitutes a true bona fide separation/break in service. Retirees or terminated employees will be required to sit out the full 180 days – no exceptions. I understand that this change can create challenges for school districts who need substitute teachers, however, let me be clear – this change has no effect on those retirees or school employees who have been retired or ceased employment once 180 days have passed. After that 180 break in service, these former members and retirees will remain available to provide voluntary and substitute service whenever called upon.
The bill also adds an additional separation of service period for school employees who accept an early retirement inducement – also called a voluntary separation agreement. These inducements include, for example, lump sum cash payments, payment of insurance costs until the employee is eligible for Medicare, additional wages, or purchase of a retirement annuity. This inducement is in addition to the retirement benefit that is paid for the lifetime of the member.
As originally introduced this separation period was 36 months, however I have agreed to reduce this period to 24 months. During this 24 month period, members who accepted an early retirement inducement will not be allowed to provide any substitute service to any school district, nor work as a consultant or contractor for any school district. Once 180 days has passed, the member can provide unpaid voluntary service to a school district. This new requirement does not impact a school retiree’s ability to work in the private sector, and once the 24 month period has passed the retiree can provide substitute service or return to work as an employee. Though this additional separation of service period will create limited savings for the plans, I am mindful of the tax dollars that pay for these multiple benefits particularly when most taxpayers don’t have access to either a defined benefit retirement plan or a buyout package. As a fiscal conservative, I believe it is necessary to be mindful of how we spend taxpayers’ dollars.
Like many other Committee Priority bills, LB 415 as advanced from Committee with a number of other bills amended into it. Most of the additional 7 bills that were added were technical clean-up bills introduced on behalf of the Nebraska Public Employees Retirement Systems – the agency that administers the plans. Here is a brief summary of each bill:
If you have any questions about any of the changes in LB 415 or any of the bills that were amended into it, please don’t hesitate to contact my Committee Legal Counsel, Kate Allen. She can be reached at 402-471-2626 or if you want to e-mail her, at firstname.lastname@example.org. My e-mail address is email@example.com, and the office phone number is 402-471-2756. My legislative staff, David and Katie, are always available to assist you with your needs. If I am not immediately available, please do not hesitate to work with them to address any issues that you may need assistance.