Changes to school retirement plan advance to full Nebraska Legislature

LINCOLN — The full Nebraska Legislature appears likely to debate a governor-backed bill to reexamine contributions for school employees’ retirement plans, which the sponsor described as a “win-win-win.”

The Nebraska Retirement Systems Committee on Monday morning voted 4-0 to advance Legislative Bill 645 by State Sen. Beau Ballard of Lincoln, the committee chair. State Sens. Brian Hardin of Gering and Danielle Conrad of Lincoln were absent from the vote, but Ballard left the vote open through at least the end of the day for both to weigh in if they choose to.

“This is a win for state tax dollars, a win for teachers and also, I believe, a win for property taxpayers as well,” Ballard told the Nebraska Examiner of his amended bill.

State contributions and funding

The school retirement plan at center stage applies to eligible school employees outside of the Omaha Public Schools, which has a separate retirement plan.

Currently, teachers and other eligible school staff contribute 9.78% of their monthly payroll to the pooled retirement plan. School districts match this at 9.88% of the amount they pay their employees, while the state contributes 2% of statewide school employee payroll each year.

The estimated payroll for teachers in Nebraska, as of July 1, 2024, was $2.5 billion annually. That means the plan took in $543 million in direct contributions — about $50 million from the state, $245 million from employees and $248 million from school districts in the most recent year.

The amended LB 645 is significantly different from when it was introduced in January, which at the time would have reduced state contributions to 0% depending on the plan’s actuarial funding status, but left contribution rates for employees and school districts the same. The plan is currently 99.91% funded.

If LB 645 moves forward, contribution levels of all three groups would change at four stages based on the actuarially funded level — less than 96% funded, between 96% and 98% funded, between 98% and 100% funded and fully funded.

The state would fall to 0.7% of annual contributions at the two intermediate stages, retaining the 2% contribution level when the retirement plan is underfunded and paying zero when the plan is fully funded.

State Sen. Rob Clements of Elmwood, chair of the Legislature’s Appropriations Committee, and a member of the Retirement Committee, said LB 645 could save the state $77 million over the next biennium.

The governor’s office maintains that the freed-up funds should not be used to balance the state’s projected budget deficit but instead to invest in education.

Increased take-home pay

Under the latest version of Ballard’s bill, school employees would contribute 9.75% of payroll if the plan is less than 96% funded. This would lower to 8.75% and 8%, respectively, at the intermediate stages. When fully funded, employees would contribute 7.25% of their individual pay to the plan. Employees were brought to the table for negotiations prior to LB 645’s public hearing last month.

Ballard’s staff provided data estimating that the average school teacher could receive $1,000 in more take-home pay if the retirement plan is more than 98% funded, as it is now, because of lower monthly contributions.

When the plan is fully funded, take-home pay for the average teacher could rise by up to $1,500 each year.

Employers would continue to contribute 101% of what their employees do, which is a first for the continued negotiations. Before, LB 645 would have locked the employer contribution rate at 9.88% of what employees are paid. Ballard said allowing lowered contributions when the retirement plans are flush could lead to reduced property taxes.

Lowered contributions at full funding would lower contributions for both employers and employees by 2.5%, potentially freeing up funding for a priority of the Nebraska State Education Association — funding more long-term substitutes so teachers can take paid time off around significant life events.

That bill, LB 440 from State Sen. Ashlei Spivey of Omaha, is planned to be advanced through the Education Committee’s LB 306. An amended version of her bill seeks a 0.35% payroll tax, for both employees and employers, to fund four weeks of long-term substitutes, rather than her original proposal’s idea for six weeks.

Excess funds collected under the Spivey proposal above what’s needed to cover subs would be steered toward teacher retention or recruitment, such as forgivable loans for special education teachers as provided in Lincoln State Sen. George Dungan’s LB 408.

Latest actuarial study

Before structural changes to state retirement plans can be made, an actuarial study must assess the feasibility. The latest study came back last Thursday indicating the plan would still receive about 0.27% more funds each year than required under state law at full funding. The actuaries said this provides “little cushion … to absorb adverse experience.”

State law currently requires that the state is on the hook for additional funding in any given year if the plan requires more funds outside of annual contributions.

The actuaries wrote that part of the “challenge” in the future will be adjusting to the varied contribution rate, which could eat into state funds, property taxes or employee pay.

The study also takes into account a phased-in slightly lower assumed return on investment for the retirement plan. State Sen. Tony Sorrentino of the Elkhorn area, vice chair of the Retirement Committee, said normally contributions would increase in that case. The actuaries agreed this could increase risk to the retirement plan.

However, Ballard and Clements noted that one built-in fail-safe is increased contributions if the funding status of the retirement plan lowers.

The actuaries predicted the probability that the retirement plan would be fully funded about 56.4% of the time over the next 20 years, while it could be less than 96% funded about 31.5% of the time.

‘This is their livelihood’

Ballard, who introduced LB 645 more than 50 legislative days ago, said he appreciated the feedback that he received from teachers, administrators, school boards, the Governor’s Office and more, all of which he said are now on board.

Conrad clashed with Ballard at LB 645’s public hearing in March in part over the bill’s negotiations. She could not immediately be reached for comment Monday on the advanced bill, nor could the NSEA.

Ballard said he took the feedback of teachers and other employees with “high consideration.”

“This is their livelihood, this is their retirement plan,” Ballard said. “We want to make sure that they are protected because they do so much for our state, and we just really appreciate their feedback.”