School Employees Retirement System

Education Community Offers Plan to Address Actuarial Shortfall

On February 6th, the Legislature’s Retirement Committee took up discussion on a proposal brought forward by the three organizations representing the teachers, administrators, and school boards of Nebraska.  The legislation, LB 553, was introduced on behalf of NSEA, NCSA, and NASB by Senator Jeremy Nordquist, who serves as chair of the Retirement Committee.

In his opening remarks, Senator Nordquist said that, “The changes in LB 553 are structured to address both short-term and long-term funding obligations in the School Employees Retirement System.”  The School Employees Retirement Plan is facing an actuarial shortfall exceeding $100 million in the next two years.  Additional shortfall projections are in the forecast for succeeding biennium.

The causes of the shortfall are several, but not the least of which is a substantial loss in assets in the retirement fund due to the lagging economy and market fluctuations.  The plan has lost over $2 billion in assets since 2008.

The options available to us are simple to describe but difficult to find political consensus and to implement.  We can either (a) increase contributions (i.e., infuse more funds into the plan), (b) find ways to reduce the overall liability to the plan, or (c) a combination of both.

LB 553 was developed with the assistance of staff from the Retirement Committee and was modeled through a computer system housed at the Nebraska Public Employees Retirement Systems (NPERS).  The concept outlined under LB 553 is nothing new to the world of defined benefit plans across the nation.

LB 553 does NOT affect the benefit structure
of current members, only future hires.

LB 553 creates a second tier or “schedule B” within the School Employees Retirement Plan, which would be applicable to new hires within school districts (except OPS) and ESUs on and after July 1, 2013.

Under the schedule B plan, an employee’s benefit upon termination of employment would be based upon a five-year average of the highest compensation service years (rather than three-year average for those currently in the plan).

The cost-of-living-adjustment (COLA) for those retiring under the schedule B would be the lesser of the Consumer Price Index Urban Wage (CPI) or 1%.  For current members of the plan, the COLA is the lesser of the CPI or 2.5%.

The rule of 85, 2% multiplier factor, and purchasing power adjustment remain in tact for future hires under the proposed schedule B plan.

Actuarial/Accounting:  LB 553 also changes an actuarial and accounting piece within the School Employees Plan, which would be applicable to all current and future members of the Plan.

Under current law, actuarial accrued liability is determined for each employee on a level dollar basis.  LB 553 would determine actuarial accrued liability for each employee on a level percentage of salary basis.  This change takes into account greater ability to pay as time passes.  As salaries grow, contributions would also grow.

Contributions:  LB 553 inserts a “placeholder” provision in the legislation in the event circumstances require an increase in the employee contribution rate (currently set at 9.78%).  The bill leaves it as an unspecified rate increase for the present time.

The bill removes the sunset for both the employee and state contribution rates.  Under current law, the employee rate would revert to 7.28% (from the current 9.78%) after the 2016-17 plan year and the state contribution would revert to .7% (from the current 1%) after the 2016-17 plan year.

LB 553 proposes to increase the state contribution from 1% to 2% beginning July 1, 2013.

Lid Exclusion:  Finally, the bill extends the spending lid exclusion for employer contributions in excess of 7.35% indefinitely.  This lid exclusion was set to expire after the 2016-17 school fiscal year.  This provision in LB 553 applies to all school districts, including OPS.

Senator Nordquist said in his opening remarks that we can either do something about the problem or watch the problem grow.  The education community rallied together to offer a solution to the problem.