Yearly Review of Plan Shows Growth, Full Funding Sooner than Expected
The outlook for the state-managed public school-employee retirement plan can pretty much be summed up in one word: sunny.
For the second year in a row, the annual review of the plan indicates it is healthy and is headed in the right direction. In fact, the plan is expected to reach 100 percent funding eight years earlier than projections from a year ago.
Further, the projections indicate the school plan will need no additional state funding beyond the statutorily-required two percent contribution through at least 2022.
Plan consultants unveiled the sunny forecast at November’s joint yearly meeting of the Nebraska Investment Council (NIC) and the Public Employees Retirement Board (PERB). The consultants reported that the plan is projected to be fully funded by 2030, well ahead of the 2038 projection of a year ago. A strong market the past two years has driven growth in the plan’s health, particularly during the year that ended on June 30.
“It has helped a lot to have a strong return in the market,” said Pat Beckham, a consultant and principal actuary with Cavanaugh Macdonald Consulting.
Changes to the Rule of 85 — plan members hired after July 1, 2018, must wait until age 60 to qualify — and other smaller changes were plan savings that contributed to strengthening the plan.
Outlook is Positive
Action by PERB members last year to lower the actuarial rate of return on investments from 8 percent annually to 7.5 percent, effective on Jan. 1, 2018, had a significant effect on projections. Yet the funding outlook remains positive, and members of both PERB and NIC boards expressed satisfaction with the outcome and trends.
Aon Hewitt Investment Consulting Partner Max Kotary reminded board members that 20 years ago nearly 80 percent of public employee retirement plans expected 8 percent return on investment. Today, about 20 percent of those plans remain at 8 percent. Most, like Nebraska, have lessened the goal to 7.5 percent or lower.
Kotary said his firm’s analysts believe there is a “better than one in three chance of meeting or exceeding the 7.5 percent rate of return.”
The plan had a 13.8 percent return on investment for the year that ended on June 30.
Beckham said the change in the rate of return increased the school plan’s unfunded liability from $1.16 billion to $1.65 billion, and lowered the funded ratio of actuarial assets from 90 percent a year ago to 87 percent on July 1 of this year.
However, for the year ending June 30, the actuarial value of the school retirement plan grew by $765 million – from $10.046 billion to $10.811 billion. And while the funded ratio of actuarial assets dipped to 87 percent, the trend is up. The plan was just 83 percent funded three years ago and 77 percent funded four years ago.
The funded ratio measures the value of the plan – with gains and losses smoothed over a five-year period – against plan liabilities.
Historically, the actuarial funded ratio of the plan hovered in the upper 80s to mid-90s, though the Great Recession pushed the ratio into the mid-70s.
No Added State Dollars
Brent Banister, also with Cavanaugh Macdonald, pointed out that the total of all contributions – state, employer and employee – to the plan, is slightly more than what is needed, which takes the state off the hook for additional funding.
“The general trend is upward. Things are moving in the right direction, short of this one blip,” said Banister, attributing the blip to the adjustment in actuarial rate of return.
The report from a year ago forecast the state plugging an additional $900,000 into the plan in 2020 and another $3 million in 2021 to keep the plan on track. November’s report suggests that no additional state contributions will be needed for at least the next five years.
In addition to the state’s required contribution, which equals two percent of teacher salaries, education employees contribute 9.78 percent of salary, and school districts contribute the equivalent of 9.88 percent of salary. The state plan covers all K-12 education employees in Nebraska except for those in Omaha. Omaha educators fall under a separate plan that was founded several decades before the state plan.