After taking criticism for overly optimistic expectations, Omaha's police and fire pension board passed a resolution Thursday saying it stands by its practice of planning for annual investment returns of 8 percent.
“It bugs me when people try to grab headlines based on concepts that, over time, have been solid,” said Aaron Hanson, a pension board member and former head of the police union.
The board points to its historical returns to defend the figure. Since 1980, the fund has returned an annualized 9.4 percent. In that context, the expected return is conservative.
In recent years, though, the numbers have been lower, as well as volatile. In September, 10-year returns were 7.3 percent; in June, 5.6 percent.
The subject has come up in the past week as mayoral candidates have sparred over a contract with the Fire Department that was adopted by the City Council on Tuesday.
One of the main goals of the contract negotiations was to find a way to put the pension fund back on a solid footing. At last estimate, the fund was projected to be underfunded by $610 million.
Projections that look at the contract's long-term impact assume a number of things, including an 8 percent annual return.
An actuarial projection found that the adopted contract will put the fund on stable ground by 2055.
But if investments return less than 8 percent, the fund wouldn't be solvent for much longer.
“You give everybody a false hope about the future,” said mayoral candidate David Nabity. “You let people believe the pension fund is solved. It's not. And you set employees up for failure.”
Nabity said he would like to see projections done based on returns ranging from 4 percent to 6 percent.
The rate is set based on an “experience study” that looks at the fund's performance in addition to contribution rates, inflation, wage increases, mortality rates and the like.
The board typically has such a study conducted every three to five years. But the last study was done in 2007 and looked at the fund's data from 2000 to 2005.
Interim pension boards have postponed follow-up studies in hopes the city could agree to new contracts with its police and fire unions. Now that firefighters have agreed to a new contract, though, it will be at least another year before a new study can be done.
That will give some time for the new contract's provisions to take effect and be measured, said City Finance Director Pam Spaccarotella.
Eight percent is a common assumed return for pension systems around the country. In a survey conducted last summer, the National Association of State Retirement Administrators found that more than a third of plans expected returns of 8 percent.
Only six plans assume returns of 7 percent or less.
Board member Dick O'Gara, the city human resources director, voted against the resolution, saying it would have little effect. People who criticize the 8 percent return assumption, he said, are applying the wrong set of investment logic.
“They're not educated on how the pension board operates,” he said. “We have millions of dollars to invest. They have, what, $10,000? It's completely different.”
Carol Ebdon, the city's former finance director and a professor at the University of Nebraska at Omaha, said using short-term returns to criticize a pension system is the wrong way to go about it. While everyday investors talk about 10 years as “long term,” she said, a pension system has to look multiple decades down the road.
“You've got people that are just beginning employment now who are going to be receiving pensions 50 years from now,” she said. “So it's important to look at it as a long-term system.”
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Returns on fund investments
Omaha's police and fire pension fund is expected to be fully funded by 2055 if things go as the city's actuary projects. One expectation is that investments will return 8 percent annually. Critics say that rate is too optimistic, given the current economic climate, and should be lowered. As of Sept. 30, the city's investment consultant showed that the fund had made the following returns.
Since 1980: 9.4
Source: City investment consultant DeMarche Associates Inc.