State Government Pension Costs Could Be on 2011 Legislative Session Agenda

CARSON CITY – The need for the state of Nevada to continue and possibly even increase funding to the public employee retirement system could make the budget problems facing the Legislature next year even worse.

A recent study by the Pew Center on the States identified Nevada’s public pension plan as one of 19 where “serious concerns” about the long-term health of the plan have been identified. The plan has a long-term unfunded liability of $9.1 billion as of June 30, 2009. If this liability had to be paid off today, it would cost every private sector worker in Nevada about $9,500 each.

Questions have been raised by some in Nevada and nationally as to whether these public pension plans are sustainable.

Carole Vilardo, president of the Nevada Taxpayers Association, said the drain on the state general fund from the pension expenses could be even more costly if, as expected, the contribution rate to keep the fund actuarially sound must be increased. It is currently at 21.5 percent, with half paid by the state and half by the employee.

Vilardo, who calls Nevada’s public pension plan “generous,” said putting additional scarce revenues into the plan will make it even tougher on the 2011 Legislature to balance the budget.

“When you’ve got a severe fiscal emergency, it may be time to move it down the road a bit and not put scarce funds into a benefit that does nothing to offer programs and services the state wants to provide,” she said.

Lynn Hettrick, deputy chief of staff to Governor Jim Gibbons, agrees that an increase in the funding of the Public Employees Retirement System (PERS) contributions could make an already bad budget situation even tougher to deal with. But any suggestion of withholding contribution increases would be risky, he said.

Dana Bilyeu, executive officer of PERS, acknowledged interim assessments suggest the contribution rate will have to be increased by 1 percentage point in the upcoming biennium. But she added that the actual cost of providing the defined benefit retirement plan is not as significant a part of the state budget as some may believe.

Of the $1.3 billion that flows into the plan each year from all participating state and local governments and employees, less than $200 million comes from the state and half of that amount is paid by the state employees. This does not count the cost of the contributions to public school teachers, however. About 37 percent of the state general fund budget is spent each year on public education.

Bilyeu said a 1 percentage point increase in the contribution rate would cost all participating employers and employees about $45 million. State employees would see their paychecks reduced by half a percentage point to pay their share of the increase. So while every hit on the budget next session will be difficult to accommodate, the actual cost of the 1 point increase would be modest, she said.

There has been discussion in recent years of changing the plan to a “defined contribution” system, where employees would take on the responsibility of investing their retirement contributions, thereby eliminating the long-term liability to the state and local governments.

Bilyeu does not support the concept, saying employees typically are not as willing to ride out the short-term fluctuations in the stock market to ensure a reasonable pension upon retirement.

The current defined benefit plan provides security to public employees at a minimal and reasonable cost, she said.

Assemblywoman Sheila Leslie, D-Reno, said Nevada’s public pension plan is very well managed and that significant changes – such as a switch to a defined contribution plan – are not needed. Leslie, who serves as the specialty courts coordinator for the 2nd Judicial District Court, is herself a member of PERS.

“Of course we have concerns about the long-term liability,” she said. “I think the stability of PERS is always on everyone’s mind. We have to look long-term to ensure it remains solvent. But this is not the time to make any radical changes.”

Vilardo agreed that switching to a defined contribution plan is not realistic right now. But the plan should be changed so that retirement ages for public employees conform to those used by the Social Security Administration, which start at age 62, along with some other reforms, she said.

The plan provides benefits to nearly 42,000 retired state and local government workers and sets aside funds for another 105,417 active employees as of June 30, 2009. Those in the plan do not participate in Social Security as part of their retirement in Nevada.

Because of growing concerns over the long-term unfunded liability and the cost of providing retirement benefits, the Nevada Legislature in 2009 passed some reforms to the program, but only for new hires beginning Jan. 1, 2010.

The retirement age for a regular state or local government employee with 10 years of service was changed to 62 from 60, and the amount of retirement credit per year of service was reduced from 2.67 percent for current employees to 2.5 percent of salary for each year worked.

Prior to this change, the Las Vegas Chamber of Commerce noted in its fall 2008 report that Nevada PERS had one of the highest “service credits,” otherwise known as a “formula multiplier,” in the nation at 2.67 per year of service. A high service credit effectively increases benefits and/or decreases the service time required to receive full benefits, the chamber report said. This higher multiplier is still in place for most public employees.

The chamber report, prepared by the Las Vegas firm Applied Analysis, also found that the system was intended to be a shared responsibility between government agencies and employees, but instead has morphed into a plan where most contributions are entirely paid by government.

Nevada state employees contribute a share to the plan, equal to the same amount paid by the state on their behalf. But the chamber report found that approximately 82 percent of regular employees and 85 percent of police and fire personnel have all contributions paid on their behalf by the employer.

State employees do not have the right to collective bargaining, while most local employee groups do use the process to negotiate wages and benefits.

The chamber analysis said the intent of the Legislature in creating the plan in the 1970s was that the contribution costs be shared.

Bilyeu disagrees with this assessment, saying local government employees gave up cost-of -living increases in exchange for their employers paying the full retirement contribution. They are sharing equally in the plan, she said.

Bilyeu would also oppose any delay in funding the pension plan, saying the Legislature has over the years followed the recommendations made by the PERS board, based on actuarial review by professional firms, in setting the rates.

The SAGE Commission has recommended several changes to reduce the costs of the plan, including setting a minimum retirement age of 60 before benefits can be paid out. Regular employees in the plan can now retire at any age with 30 years of service.

Other recommendations include calculating the retirement benefit over five years of pay, not the current three highest pay years; reducing the multiplier even further than the 2.5 percent per year approved by the Legislature in 2009, recommending a 2.15 multiplier instead; and imposing a moratorium on any benefit enhancements until the plan is fully funded.

The SAGE Commission said the change to the multiplier and retirement age should be examined separately for police and fire fighters, employee groups that have a different benefit plan within the PERS system.

Bilyeu said most state employees retire with 20 years of service, not 30, so the legislative change to the minimum retirement age to 62 after 10 years of service has had the effect sought by the SAGE Commission and others of equating retirement age to that used by the Social Security Administration.

Critics of the current retirement plan also question the use of an estimate of an 8 percent return to the fund, suggesting a lower return would be more realistic.

Bilyeu said the state’s plan has an annualized return of 9 percent over the past 25 years. While there has been some discussion of lowering estimates of returns in this new era of investing, it is not likely something she will recommend. The return rate will be monitored closely, however, Bilyeu said.

There is no doubt the recent major downturn in the market had a huge impact on the retirement fund. For fiscal year 2009, net assets to the plan decreased by $3.4 billion, or 15.4 percent, to $18.8 billion.

At the low point, the plan has a value of $15.8 billion, Bilyeu said. It is now at $22 billion, just below the high point of nearly $23 billion when the market turned. So far this fiscal year to date, the rate of return on the plan is 16 percent.

While the Pew study and others highlight the challenges states face in addressing their long-term public pension challenges, there is some reason for optimism, the study says.

“While the economic downturn has exposed serious vulnerabilities in states’ retirement systems, it also appears to be spurring policy makers across the country to consider reforms.”

Vilardo agrees, saying: “It could be an opportunity to correct past problems.”

This is the second of a series of stories on the Public Employees Retirement System.  In our next story, candidates for governor will weigh in on the need for PERS reform.

Audio files from this story:

[Audio 1] Hettrick – Contribution increase would make 2011 budget problems worse.

[Audio 2] Hettrick – Delaying contributions to plan not a good idea.

[Audio 3] Bilyeu – PERS plan provides good retirement at reasonable cost.

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