2005: Retirement Legislation

LB 503 (2005) embodied a number of technical and substantive changes to several state sponsored public employees retirement plans. ;nbsp;Under the School Employees Retirement System, the four major provisions of the legislation included: ;nbsp;(1) an increase in the contribution rate; (2) provisions concerning salary spiking; (3) school reporting of salary information; and (4) provisions for a temporary spending lid exclusion. ;nbsp;It was the latter of these provisions that impacted the state aid formula.

Contribution Rate

In order to address a $14.9 million actuarial shortfall, LB 503 raised the contribution rate under the School Employees Retirement System for a period of two years. ;nbsp;The prior employee contribution rate was set at 7.25% with an employer rate of 7.32% (automatically set at 101% of the employee rate). ;nbsp;LB 503 caused the rates to change as follows:

Effective September 1, 2005 to August 31, 2006:

• Employee: ;nbsp;7.98%
• Employer: ;nbsp;8.06%

Effective September 1, 2006 to August 31, 2007:

• Employee: ;nbsp;7.83%
• Employer: ;nbsp;7.91%¹

The actuarial shortfall, so called because the state actuary determined that additional contributions were necessary to maintain a financially sound system, was due largely to the economic problems faced by the nation in the previous three years.

An increase in the contribution rates has obvious implications for local school systems in terms of what the schools are willing to settle during teacher contract negotiations. ;nbsp;For school boards, it means additional expenditures to pay for that portion of employee benefits. ;nbsp;For teachers and other school employees, it could mean less take home pay.

Salary Spiking

Prior to the 2005 Session, the School Employees Retirement System utilized what was commonly referred to as the "10% rule." ;nbsp;Under this rule, the amount of compensation that may be counted toward retirement for each plan member was capped at 10% growth from the previous year. ;nbsp;The rule did not limit the amount a school board may pay an employee, but it did limit the amount a plan member may count toward retirement. ;nbsp;The 10% rule applied to each year of membership prior to actual retirement.

There were two exceptions to the rule: ;nbsp;(1) if the member experienced a substantial change in employment position; or (2) if the excess compensation occurred as the result of a collective bargaining agreement between the employer and a recognized collective-bargaining unit or category of school employee. ;nbsp;The latter of these two exceptions applied to teachers in particular.²

One of the policy issues addressed by LB 503 was that the existing 10% rule simply did not curb the problem of salary spiking by school employees, which sometimes occurred in the last few years of employment prior to retirement. ;nbsp;There was some question about the extent of this problem, but there had been several pieces of legislation introduced to address the real or perceived issue. ;nbsp;In 2004, the Legislature's Retirement Committee introduced LB 1081 to amend existing law to include the false or fraudulent reporting of compensation received that includes amounts not defined as compensation for purposes of the School Employees Retirement Act.³ ;nbsp;LB 1081 was never advanced from committee, but it did lead to an interim study to address the issue. ;nbsp;The subsequent study led to the introduction of LB 411 in the 2005 Session, the contents of which were absorbed into LB 503.⁴

To address salary spiking, LB 503 put into place a similar system used in other states to limit the amount of salary increase counted toward retirement. ;nbsp;Beginning July 1, 2005, LB 503 implemented what might be loosely called a "floating cap" to determine compensation for purposes of retirement. ;nbsp;In the determination of compensation for members on or after July 1, 2005, LB 503 implemented an annual compensation cap of 7% (for purposes of the retirement plan) for each of the last five years (60 months) of employment prior to actual retirement. ;nbsp;This does not preclude an increase in compensation greater than 7%, but no more than 7% would be counted toward calculation of retirement benefits in each of the last five years of employment.⁵

There are three exceptions to the new cap, and one of these exceptions gives rise to the rationale for calling it a "floating cap." ;nbsp;The first exception is consistent with that under previous law: ;nbsp;the member experienced a substantial change in employment position. ;nbsp;The second exception is a modified version of previous law in that the 7% cap would not apply to employees covered by a collective bargaining agreement between the employer and a recognized collective-bargaining unit or category of school employee. ;nbsp;The twist in this modified exception is that, if the collective bargaining agreement arrives at an average compensation increase in excess of 7%, that percentage would also apply to employees not covered by the collective bargaining agreement (e.g., school administrators). ;nbsp;The third exception applies to compensation increases in excess of 7% due to a district-wide permanent benefit change made by the employer for a category of school employee.⁶

School Reporting

In order to assist the Nebraska Public Employees Retirement Systems (the Retirement Agency) in monitoring salary information from school employees, LB 503 also requires school districts to report each occurrence of an employee's compensation exceeding 7% of the previous year's compensation. ;nbsp;The "self-reporting" provision requires the employer district to report such information within 90 days of the end of the plan year. ;nbsp;The Retirement Agency would maintain this information in order to assist the administration of the floating 7% cap under LB 503.⁷

Spending Lid Exclusion

On April 11, 2005, Senator Ron Raikes succeeded in a motion to return LB 503 to Select File for specific amendment.⁸ ;nbsp;The Legislature subsequently adopted Senator Raikes' proposed amendment to LB 503 concerning a temporary spending lid exception for the amount of the contribution increase born by employer districts. ;nbsp;The spending lid exception would apply only to the 2005-06 and 2006-07 school fiscal years. ;nbsp;The current employer contribution rate was set at 7.32% of employee salaries. ;nbsp;LB 503 would raise the employer rate to 8.06% for 2005-06 and a slightly lower rate of 7.91% for 2006-07. ;nbsp;The employer rate would automatically return to the 7.32% rate beginning in 2007-08, at which time the spending lid exception would automatically sunset.⁹