Nebraska’s Growing Municipal Pension Funding Challenges

Executive Summary

Public pension debts from three major municipal plans in Nebraska are approaching $1 billion and an analysis of Omaha’s two municipal systems and Lincoln’s public safety plan suggest that this shortfall is likely to continue to expand unless policymakers make meaningful changes to how the cities fund and manage the retirement plans.

In 2015, Omaha city officials took important first steps in addressing funding challenges by establishing a cash balance plan for all new members of their civilian plan. The city’s plan for public safety employees—with roughly three times the unfunded liabilities as the civilian employee plan—remains unchanged and still exposed to significant risks of underfunding, undervalued liabilities, and underperforming investments.

In 2017, Lincoln took a prudent step of its own by requiring that city budgets fully pay the actuarially determined cost of providing pension benefits to its public safety workers. Although, like Omaha, risks to financial sustainability remain for Lincoln’s public safety plan.

Omaha and Lincoln plans will need to address accrued pension debts and this challenge will require exploring potential reforms to contributions, assumptions, amortization policies, plan design, and more. Nebraska’s municipal plans currently face the challenge of pension promises for which they only hold about half of the necessary funding to afford. But well-informed comprehensive reform can help manage long-term costs for taxpayers, as well as improve retirement security for public workers.

The growth of accrued liabilities with significant risk exposure is similar to an oil spill. The first step is always to make sure that the leak is capped. That is what capping the liabilities of Omaha and Lincoln would do. However, even once the leak has been contained, there is still a need to clean up what has been spilled. That is what the recommended funding policy improvements would accomplish.

The cash balance plan for Omaha ERS was a good first step toward improved solvency, but the existing liabilities of the defined benefit plan are still exposed to the risk of underperforming the existing assumed rate of return. These unfunded liabilities are like leaving toxic waste alone. Without cleaning it up, it will lead to more damage. Omaha and Lincoln’s police and fire plans face risks in both existing and accruing liabilities.

Overall, Nebraska’s two largest cities have made progress in addressing pension issues in recent years, but, given the current status quo, their unfunded liabilities are likely to continue growing and harming city finances.

Full Policy Brief: Omaha and Lincoln’s Growing Challenges in Pension Funding