State Retirement Plan Makes Gains

Annual Review Indicates Fund Continues to Gain Strength

The 2019-20 fiscal year marked another solid 12 months for the state’s retirement plan for teachers.

Although the 2.4 percent return on investment for the year that ended June 30 fell well shy of the 7.5 percent assumed rate of return, the plan’s funded ratio improved from 90.3 percent to 91.65 percent. The improvement in funded ratio was largely attributed to a lower than assumed cost of living adjustment of 0.52 percent. The assumed COLA is either 2.25 percent or 1 percent, depending on the plan member’s tier, said consultant Pat Beckham.

A five-year return after “smoothing” of assets was at 6.4 percent, and even though that return was an actuarial loss, the school plan gained in value and “is very well funded,” said Beckham. She said the median funded ratio of most large public pension plans across the country is in the 75 percent range.

Beckham is a consultant for Cavanaugh Macdonald Consulting and made her comments during the company’s July 1, 2020, Actuarial Valuation Results  report and annual message to the Nebraska Public Employees Retirement Systems (NPERS) Board of Directors on Nov. 16. Beckham also reported on the state-managed retirement plans for State Patrol employees and the state’s judges.

Plans On Schedule ‘to Meet Obligations’

Just seven years ago, following the Great Recession, the school retirement plan’s funded ratio was 77 percent. A retirement plan’s funded ratio is the level of assets in proportion to the plan’s liabilities.

The State Patrol plan was funded at 88.13 percent on July 1, up from 87.34 percent a year ago. The plan for judges was at 97.34 percent, down slightly from 98.08 percent a year ago, with the drop attributed to a lower-than-forecast collection of court fees during the last fiscal year.

“The bottom line is that we are on schedule to meet obligations, and if not, we make adjustments,” said Beckham.

The annual assessment reviews a snapshot of the plan taken on July 1 of each year – the first day of the state’s fiscal year. The review also projects where the plan might be headed.

Change in Assumption to be Considered

In October 2016, the board reduced the actuarial assumed rate of investment return on plans from 8 to 7.5 percent annually, effective July 1, 2017. At the time, consultants said lowering of expectations was an industry trend, and that before the Great Recession, 60 percent of retirement plans used the 8 percent assumed rate. By 2016, that figure had fallen to 20 to 25 percent.

Lowering the assumed rate of return increases the chance that the rate will be met, and Beckham’s firm recommended that the board considered lowering the rate to 7 percent. Under the proposal, the rate would drop a two-tenths of a percent next year and a tenth of a percent the following three years to get to the 7 percent mark.

In 2016, the drop from 8 percent to 7.5 percent, combined with a slight upward adjustment of mortality rates at the time, reduced the projected school plan funded rate to 84 percent in 2019. However, that drop was never realized, and the plan’s sturdiness has strengthened each year since.

The NPERS board is expected to act on the rate of return recommendation at a December meeting. Any change would take place on July 1, 2021.

A ‘Snapshot’

Beckham cautioned the board not to read too much into the numbers.

“Valuation is a snapshot of a single date. If we reviewed it today, it would look different,” she said.

Of the three, only the school plan’s market value improved, and that was a very modest uptick. The other plans saw a miniscule loss in value. The school plan’s market value assets grew by $70.8 million, to $12.285 billion, a .05 percent increase. The market value assets for the plan for state judges fell from $195.7 million to $194.5 million. The market value assets for the state patrol plan fell from $436.6 million to $435.8 million.

Beyond the statutorily required 2 percent state contribution each year, Beckham said the school plan will need no further state funding in the coming year, or in the next 30 years, assuming all current assumptions are met.  Further, the school plan appears to be on track to be 100 percent funded by 2031.

The state contributes funding equal to two percent of teacher salaries each year. Education employees contribute 9.78 percent of salary, and school districts contribute the equivalent of 9.88 percent of that salary. The state plan covers all K-12 education employees in Nebraska except for those in Omaha, where education employees are covered in a separate system that predates the plan for teachers in the rest of the state.

The Largest Plan

The state patrol plan includes 931 members, and the plan for judges includes 347 lives. The school plan is by far the largest, with 94,126 active and retired educators either contributing to or benefitting from the plan in retirement. That number is up from the 91,909 school plan members a year ago.

Janis Elliott chairs the NPERS board, was a member of NPERS when she taught at Bellevue, is a former member of the NSEA Board of Directors and is now a physics teacher at Omaha Central High School.