Tax levy may support Omaha schools' underfunded pensions
Nebraska’s biggest school district, Omaha Public Schools, is looking for a solution to its more than $770 million of unfunded pension liabilities and may find some extra revenue in the state’s property tax relief bill.
State lawmakers are considering a property tax relief bill that includes a provision that would allow the school district to levy a new property tax of 6 cents per $100 valuation to pay down its pension shortfall.
The levy authorization is packaged within a plan that proposes reducing the district’s general fund property tax levy by 10 cents. OPS taxpayers would still see some property tax relief — about 4 cents per $100 valuation, or about $60 a year for a $150,000 home.
“It’s a win-win for a very bad situation,” said State Sen. Mike Groene, R-North Platte, chairman of the Legislature’s Education Committee. Groene is a sponsor of the legislation.
Gov. Pete Ricketts has said he opposes the plan because it shifts tax the property tax burden onto other taxes, including a three-quarter-cent increase in the state sales tax.
The proposal would increase cigarette taxes by 36 cents a pack, to $1, and repeal tax exemptions on several items, such as candy and soda pop, and services like those provided by plumbers and movers, and veterinarian care for pets.
Ricketts said the OPS pension provision would give the district an opportunity to raise taxes and spend more.
“They need to understand that they’re responsible" for the pension problem, Ricketts said.
How far such a fix would go to address the system’s liability is uncertain.
Blake Yocom, an analyst with S&P Global Ratings, said that the district has already been making extra payments in the last four years with little impact on the debt.
In 2017 the district paid $35.2 million in statutory contributions plus an additional $12.75 million toward its pension obligations. It paid an additional $19 million last year and is projected to pay $26 million this year — more than 4% of the district’s $617 million budget. Payments are set to continue to rise in the future, Yocom said.
“With doubling their contribution the district has still seen a pretty stark increase in their unfunded liabilities,” Yocom said. “The levy would have to raise significant additional revenues to make an impact on their pension underfunding.”
The district also has about $640 million in outstanding debt, and that is expected to increase significantly given the $410 million authorization that voters approved last May. Those funds will be used to fund school renovations, classroom additions and the construction of five new schools.
“Depending on when they come to market, it could expand their debt profile fairly significantly as well,” Yocom said.
S&P lowered the rating on the district’s general obligation bonds to AA-plus from AAA in 2017. It revised the outlook to negative from stable in November 2018.
Moody’s Investors Service rates the district’s general obligation unlimited tax and limited tax GOs Aa2. The outlook is stable.
“We have been monitoring the pension situation and it’s really gotten bad in a hurry,” Yocom said. “If you look at the most recent CAFR report their funded ratio is now under 60% and as recently as 2015 it was high as 75%, and this is all while the district has been making pretty dramatically increased contributions."
The district had originally sought legislative authorization to issue $300 million pension obligations bonds but failed to gain approval. The district’s failure in that vote has required it to lean more on its general fund for payments into its retirement system.
Yocom said that the situation has had an impact on OPS’ available fund operating budget of $153 million.
“For fiscal 2019, which we don’t have updated numbers budget although we should have some soon, the district has said that the budget gap could be as big as $50 million,” Yocom said. “They admitted that they were not going to be able to close all of that and probably would use a pretty significant number of fund balance — over $20 million.”
Future demands for extra pension payments are projected to gradually escalate by about $2 million a year: to $21.3 million next year, $23.5 million in 2020, $25.3 million in 2021 and $26.9 million in 2022.
The district cut nearly $30 million from its 2018-2019 budget. That resulted in the elimination of roughly 180 positions, many of which were already vacant, cuts to central administration and pay freezes for most employees, excluding teachers. The district also drew down $21.6 million from its cash reserves.
The district’s budget is reeling from significant investment losses by the Omaha School Employees’ Retirement System, which Yocom said is the main reason the pension situation “got so bad so quickly.”
The pension fund’s growing shortfall caused the Legislature in 2016 to strip OSERS and OPS of the authority to invest its pension funds, turning that duty over to the Nebraska Investment Council, which invests assets for statewide pension systems.
Yocom said it was too soon to assess what impact the switch has had on the system.
Chad Aldeman, the editor of TeacherPensions.org, a project of Bellwether Education Partners, a nonprofit educational consultant, said the solutions don’t yet match the challenges.
“Actuarially required contributions in the district are up over 27% of salary,” Aldeman said. “That's partly a function of lower-than-expected investment returns.
Aldeman said that the Omaha, however, is not that far below the national average for public plans.
“So the district may have made some mistakes in their investment strategy, and the new legislation might provide some needed expertise, but the district is already struggling to carry these debt burdens on their own.”
Monique Farmer, a spokesperson for the school district, said that the district, through a coalition of OPS stakeholders, is exploring possible solutions to the pension shortfall. “The group is working with legislators to consider potential options for stabilizing the pension payments and closing the gap,” Farmer said. She declined to provide details on those options.
The legislature recently approved a study that would consider the impact of transferring the management of the pension fund to the state of Nebraska. That study is expected to take two years to complete, Farmer said.
That bill also requires state retirement officials to analyze the steps needed to take over management of the pension system.
Yocom said that the option to merge OPS’ system into the state system is not without controversy. “Will the state absorb liability or just take over management? The devil is in the detail on whether something like that could pass,” he said.
Omaha is the only school district in the state that has its own pension fund for teachers and other employees. All the others fall under a state-administered plan. The district serves an estimated population of approximately 360,000, enrolling 52,700 students in pre-kindergarten through 12th grade.