The City of Omaha’s two pension funds earned smaller investment returns last year as the city tries to dig itself out of its pension shortfall.
The city expects a return of about 8 percent each year. In 2014, the fire and police pension fund returned 4.9 percent and the civilian fund 5.5 percent, according to annual performance appraisal reports for the funds.
Finance Director Steve Curtiss described the lower 2014 return as a normal fluctuation and said one poor year doesn’t cause concern. He noted that, long term, both pension plans average more than 9 percent annual returns.
Although critics warn that the city has overly optimistic projections for the funds, Curtiss said 8 percent is a reasonable target going forward.
It might be too high for another investment fund, such as a 401(k), that is designed to end in the future, Curtiss said. But a pension fund is designed to exist forever. That allows the city to take a longer view with investments that take decades to pay off, Curtiss said.
“It makes us something very different than the average retirement planner and fund,” he said.
Curtiss said the fund invests in some items that wouldn’t be common in a retirement plan, such as real estate and timber.
The City of Omaha, under Mayor Jean Stothert, has made big changes to its pension plans as it tries to pull itself out of a shortfall that totaled $825 million as of 2013. A bond rating agency last year cited the unfunded pension liability in lowering Omaha’s bond rating.
Critics of the city’s pension system, however, say 8 percent is an unrealistic assumption for such a fund in the post-Great Recession economy. They argue that the city should be more conservative with its projections.
The Platte Institute, a Nebraska think tank that advocates for limited government, argues that Omaha needs to take further steps to fix its pension plan.
If the city assumed a lower rate, which Platte says is more reasonable going forward, the shortfall would grow to $1.46 billion, according to the institute.
The institute plans to take the discussion to Lincoln to advocate for broader changes, CEO Jim Vokal said.
Vokal said the group is working with Omaha-area lawmakers in an effort to mandate that Omaha’s pension plans move away from a traditional plan, generally called a defined benefit plan, toward something more like a 401(k).
That way, Vokal said, if the city doesn’t meet its projected returns, it’s not on the hook to make up the difference.
Omaha’s civilian unions have adopted a hybrid retirement plan called a cash balance plan. But the city’s police and fire unions have rejected such a move, saying their systems are on the path to sustainability without such measures.
“I think we can present the case — and taxpayers can present the case — that we’ve got a large looming liability out here and we need to cut our losses and start a system with new employees that is more sustainable,” Vokal said.
City Councilman Rich Pahls has expressed concerns about the city’s smaller 2014 returns. He said explanations from city staffers made him feel better, but he plans to keep an eye on pension returns.
“It caught me a little off-guard, but they told me it was just one year,” Pahls said.
Curtiss said a string of several bad years could cause more concern. But he is comfortable because over time the fund has performed better than its 8 percent goal.
“We have a long, long history of (earning) 9.5 percent,” Curtiss said.
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