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Pension review committee recommendations could save city money on police, fire plan
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Pension review committee recommendations could save city money on police, fire plan

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The city could see substantial savings on the police and firefighters pension plan, including more than $4 million next year, through changes recommended by a seven-member pension review committee.

With no changes, the plan will cost the city more than $12 million next year, based on contribution recommendations from the actuarial company hired by the city to monitor the plan.

The committee recommendations range from an accounting change to requiring union members to share in the pension fund risks. The accounting change would not affect benefits but would save the city about $4 million next year and $208 million over 30 years.

The risk sharing recommendation would likely mean police and firefighters would have to contribute more from their paychecks when the plan has financial problems.

The committee is not recommending the city move to a defined contribution plan for new police and firefighters because of the cost.

The recommendation that the pension fund risk be shared by employees was the most controversial and led to a split vote on the total report. One member, Dan Marvin, voted against the report because it included the shared risk recommendation and higher costs for employees.

Defined benefit versus defined contribution plans

The defined benefit plan, which covers more than 1,100 police and fire department employees and retirees, provides a guaranteed monthly income at retirement (as early as age 50), of 64 percent of the final year’s salary. Employees pay around 8 percent of their earnings into the plan each year and do not participate in the federal Social Security plan.

All other city employees have a defined contribution plan, where the city contributes a specific percentage each year, but benefit and investment results are not guaranteed. These employees participate in Social Security.

Under the defined benefit plan, the city (taxpayers) assumes all the risk of guaranteeing a specific percent of salary as a lifetime retirement benefit.

The committee is not recommending that the city switch to a defined contribution plan for new police and firefighters because of the costs involved, though many Lincoln residents advocated for this move, the report said.

The city would likely pay an additional $78 million over nearly 30 years to start a new plan and to provide retirement benefits for current employees, according to the report.

The city cannot drop the defined benefit plan for current employees because the courts have ruled it is a constitutionally protected long-term contract. So the city would have to fund those benefits without any help from new employees if those workers were moved to a defined contribution plan.

“The unanimous belief of the Pension Review Committee is that we should retain Lincoln’s defined benefit pension plan provided important changes are made to make it more affordable and sustainable,” said the committee report.

City leaders could move forward with four of the recommendations without approval from the police and fire unions. The other five suggestions would have to be negotiated with the two unions.

The pension review committee was appointed by Mayor Chris Beutler and Councilman Trent Fellers to look at the defined benefit plan in light of the financial problems -- it is underfunded by about $103 million -- and rising city costs for the plan.

Because of the plan's unfunded liability, the city will be paying more than 27 percent of the total payroll in fiscal year 2017, or more than $12 million that year, in order to make sure the plan remains financially sound. The city was paying around $4 million a year in 2007.

Bad luck and bad decision

Though some of the current financial problem was created by bad luck -- the stock market crash in 2008 -- there have also been some bad decisions over the years, according to the committee analysis.

There appear to have been some poor investment decisions that could have cost as much as $34 million over time, the committee said.

City leaders also decided to fund less than recommended amounts in 19 of the past 26 years, shorting the pension fund by about $7 million.

In 11 of those years the pension was fully funded or fairly near fully funded, so “perhaps our elected leaders felt they could contribute less than what was recommended,” the report said.

“Whatever the reasons the City’s pension contribution was shortchanged too often. The committee thinks that’s just bad policy.” And one of the recommendations would require funding the pension plan at the recommended level each year.

The committee report also pointed out that several years ago the City Council rejected a negotiated benefit -- a guaranteed COLA -- in return for the police and firefighters contributing an additional 4 percent of their salary, raising the general contribution to 12 percent of salary. That would have assured that employees paid more of the pension costs.

Committee warning

The committee report also issued a warning that if Lincoln’s pension issues cannot be resolved, “there may well be increasing pressure to do away with a defined benefit plan altogether, despite the cost of doing so.”

“Or, perhaps more likely, pressure will be put on state government to make changes (in the law) which allow cities to make modifications to pension plans more easily.”

Pension Review Committee members, who have been studying the pension plan issues for almost five months, are Richard Evnen, former business owner and committee chair; Trent Fellers, chair of the Lincoln City Council; Don Herz, former city finance director; Kyle Kollmorgen, Kollmorgen & Associations; Dan Marvin, president of Marvin Investment Management Co.; Gina Simpson, director of Wealth Management for Ameritas; Lincoln Zehr, CEO Hampton Enterprises.

Reach the writer at 402-473-7250 or nhicks@journalstar.com

On Twitter @LJSNancyHicks.

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Reporter

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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The first recommendation – an accounting change -- saves the city (taxpayers) the most money.

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