CARSON CITY – Both Democrat and Republican lawmakers agree the 2011 legislative session will likely see a debate about the future of Nevada’s public employee pension program, but differences remain over whether radical change is needed to protect the state from a multi-billion long-term unfunded liability.
The $9 billion question is whether the Public Employees Retirement System should be converted to a “defined contribution” program for new hires, or whether the “defined benefit” plan now in place for state and local government employees, including teachers, should be preserved.
In anticipation that the future of Nevada’s public pension program will be a topic of discussion in 2011, the board that oversees the program voted last week to undertake an analysis of what a conversion to a defined contribution would mean in terms of cost and required regulatory changes, said Tina Leiss, operations officer for PERS.
“It is not something the board is proposing,” she said. “They want to be prepared to provide facts.”
The study is expected to come to the board for review this fall, Leiss said. It is being performed by the system’s current actuary at no additional cost.
PERS officials argue that major changes to the plan are unnecessary because the contributions flowing into the plan from government and public employees, combined with an estimated 8 percent rate of return on investments over time, will see the plan fully funded in the next 30 years. The contribution rates are recommended by an actuary, approved by the seven-member PERS board and the Legislature every two years.
The Nevada Legislature has always endorsed the contribution rate approved by the PERS board, and those contributions have not been diverted to other uses as has occurred in some others states.
The state retirement plan was estimated to have a long-term unfunded liability of $9.1 billion on June 30, 2009. At its high point the state public pension plan was 85 percent fully funded. It now stands at 72.5 percent.
A recent study of state and local government pension funds by the Pew Center on the States identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan.
The question of what state and local governments should do to resolve the long-term financial uncertainty of their public pension plans is a concern nationally. A number of independent reviews have shown that many of the plans are underfunded and not likely to remain solvent over the long term.
A new report suggests the federal government and taxpayers nationally could end up bailing out the underfunded plans.
Assemblyman Pete Goicoechea, R-Eureka, said he believes the time has come to change the plan to defined contribution, which would provide new public employees a contribution to their retirement that they would then invest on their own behalf.
“It’s going to be tough enough to keep it afloat as it is,” he said.
The current plan called defined benefit, where public employees are guaranteed a specified retirement income upon retirement based on salary and number of years of service, cannot be continued, Goicoechea said.
While employee recruitment and retention would likely be a problem going forward, the pension plan needs to change to bring it more into line with what is offered in the private sector, he said.
Assemblywoman Sheila Leslie, D-Reno, said an estimated $3 billion general fund budget shortfall for the next two-year state budget means all issues have to be debated in the session, including the public employee retirement system.
“I think, when you are $3 billion short, you have to look at the basic structure,” she said. “So we have to look at structural changes, both on the expense side and the revenue side. So I am not willing to exclude anything.”
But Leslie said at this point she believes the defined benefit plan should be continued.
Requiring public employees to make their own investment choices could jeopardize their retirement if the stock market suffers downturns as it is doing right now, she said. The result could be retirees with inadequate retirement income, which could then lead the state to deal with the problem, Leslie said.
Senate Majority Leader Steven Horsford, D-Las Vegas, acknowledges that the public pension program, and whether it needs reform, will be one of the top issues in front of lawmakers next session.
But the Legislature has acted to keep the retirement plan funded by adjusting contribution rates paid both by public employers and their employees, he said. There seems to be an assumption by some that if everyone retired today that a $9 billion bill would come due, but that is not how retirement plans work, Horsford said.
The potential for a change to a defined contribution plan is not the only reform proposal on the table. The SAGE Commission has also recommended a number of changes to the current defined benefit plan to bring pension costs down. The Spending and Government Efficiency panel appointed by Gov. Jim Gibbons to review government operations did not recommend a change to a defined contribution plan, however.
SAGE commission recommendations include 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 and imposing a moratorium on any benefit enhancements until the plan is fully funded.
All three Republican candidates for governor advocate a change to a defined contribution plan, saying such a program would be more in line with what is offered in the private sector.
The expected Democrat candidate, Rory Reid, has not yet come to any conclusion on what changes, if any, are needed to the plan, saying those who hold opposing views need to first come to some consensus on the issue.
The 2009 Legislature did make some modest changes to the retirement plan for new hires starting Jan. 1, 2010, including increasing the retirement age after 10 years of service to age 62 from 60.
Any changes to the plan would affect only new hires. The pension plan has been determined to be a vested property right for current employees that cannot be changed.