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Governments need to reform defined benefit plans, expert says

Governments need to reform defined benefit plans, expert says

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Driven by the rising cost of defined benefit pension plans, cities and states are finding ways to change those plans and cut future costs, a pension expert told a group reviewing Lincoln's pension program.

When Chuck Reed was mayor of San Jose, California, voters in the city of 1 million -- a Democratic-leaning city in a Democratic county in a Democratic state -- approved several pension reforms.

The courts overturned some of those changes, including requiring current employees to pay substantially more of the pension costs, but the changes are saving the city about $30 million a year, Reed told members of the city's special Pension Review Committee last week.  

That appointed committee is studying the city's defined pension plan for police and firefighters and expects to have a report ready for city leaders this spring. 

The city will be looking at the defined benefit pension issues in its next budget cycle, said Mayor Chris Beutler, pointing to the enormous increase in the city's contributions to these plans, from $3.4 million in 2007 to around $12 million next fiscal year.

"Dealing with the police, fire pension plan must be a priority in 2016," he said recently.

Reed described some of the changes other governmental jurisdictions have made in an effort to curb the costs of defined benefit pension plans, which guarantee lifetime monthly retirement checks usually based on previous earnings. 

* Reducing benefits for future years of service.

* Change cost-of-living adjustments.

* Ending the practice of sending out a 13th monthly check, sometimes called a bonus check, to retirees when earnings from pension fund investments are above a specific level that year. This is a practice in Lincoln.

* Creating new pension plans for new employees. These include moving from defined benefit plans to defined contribution plans and hybrid plans that use both defined contributions and defined benefits.

* Increasing the retirement age.

* Increasing the contribution for employees.

* Reducing retiree health benefits for plans that include health benefits.

It is common for cities to eliminate the extras, that 13th check, for example, and reduce cost-of-living adjustments, Reed said. It is also a common practice to increase employee contributions.

There are probably 100 different things the city could do. There is no one answer for Lincoln, he told the committee, which has spent the past two months learning about the city’s defined benefit plan for police and firefighters.

Other city employees have a defined contribution plan, where the city and employee contribute to the plan, with no guarantee of how much will be available upon retirement. 

Cities and states are looking at defined benefit pension plans because the cost of guaranteeing retirement benefits is hurting government entities' ability to fund services, said Reed, who is now part of Retirement Security Initiative, a bipartisan advocacy organization focused on protecting the fairness and solvency of public sector retirement plans.

Reed offered to come to Lincoln at the expense of his organization after learning about the pension review committee.

Like Lincoln, San Jose adequately funded its defined benefit pension plans for years, but was hit by the stock market collapse of 2008 and subsequent low rates of return.

San Jose also faced much worse budget problems than Lincoln during the recession. San Jose laid off about a quarter of its workforce, including some police and firefighters, and cut city employees' pay by 10 percent.

All San Jose city workers have defined benefit plans, while only police and firefighters are covered by these plans in Lincoln.

Some of today's funding issues stem from previous decisions. Many communities increased pension benefits during the “irrational exuberance” of the 1990s, Reed said.

“We thought we were rich and the stock market was going to go up forever, so we had benefit increases and wage increases," he said. 

In deciding what to do city leaders need to look at the benefit level they desire, what should be the risk of employees and taxpayers, the impact on employee retention and recruiting and the legal constraints, Reed said.

In California the general legal rule is that you cannot make changes for current employees. What they expected on the day they were hired is “vested” and cannot be taken away, he said.

There is a given in any pension plan, he said. “No matter how you design your plan, if you don’t put money in it, it won’t work. Many places are systematically underfunding their plans,” he said.

The six-member committee will hear from union representatives at its next meeting Feb. 23 and will begin working on recommendations to city leaders in March.

Reach the writer at 402-473-7250 or On Twitter @LJSNancyHicks.


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Nancy Hicks reports on Lincoln city government, but she’s been following the leaders of local and state government for more than 40 years.

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