Nevada Policy Makers Remain Divided On Future Of Public Employee Pension Plan

CARSON CITY – Nevada policy makers remain divided over the need to make a fundamental change to the public employees’ retirement system following the release last week of a report showing significant costs to move to a defined contribution plan.

Some lawmakers say they have not yet read the report by the Segal Group Inc. which says it would cost about $1.2 billion over the next two years to change from the current defined benefit plan to a defined contribution plan for new state and local government workers. These additional costs would continue for several years.

Lawmakers on both sides of the issue say they need more information and expect to hear more details of what such a shift would entail in the upcoming legislative session.

Gov.-elect Brian Sandoval continues to favor a change to a defined contribution plan for new government hires, but has not yet reviewed the study in-depth, said spokeswoman Mary-Sarah Kinner.

She said Sandoval expects to meet with the staff of the Public Employees’ Retirement System after taking office in January.

“Gov.-elect Sandoval remains committed to the concept of defined contribution as discussed in the campaign,” Kinner said.

Assembly Minority Leader Pete Goicoechea, R-Eureka, said he believes the retirement system will have to be changed over to a defined contribution plan, but that he needs more details on how such a change would be accomplished.

The price tag just for the next two years gives him concerns as well.

Goicoechea said if the contribution rates have to be increased significantly for current public employees to fully fund the current pension plan within about a decade, it could be a big hit to workers as well.

Contribution rates, which now are shared by employers and employees, are set to increase over the next two fiscal years to keep the current defined benefit plan financially healthy. Rates will go up to 23.75 percent from 21.5 percent now for regular employees.

But to fund the plan more quickly, the rate would have to increase to 34 percent instead, according to the Segal report.

For police and firefighters, who are analyzed separately, the increase would go from the proposed 40 percent contribution rate over the next two years to 52 percent.

The cost of these increases would total $1.2 billion for the coming two years, and would continue until the closed defined benefit plan was fully funded.

If these increases are shared by workers, it would mean a significant pay cut, Goicoechea said. It could also lead to a mass exodus of current employees who are eligible for retirement, he said.

Goicoechea says he does favor changing to a defined contribution for new hires.

“But I want to see some more on the plan before I really step out there,” he said.

Assembly Speaker John Oceguera, D-Las Vegas, said he does not believe a major change to a defined contribution plan is necessary. But there is no question that the long-term unfunded liability of the current plan, which hit $10 billion as of June 30, needs to be paid down, he said.

“If we can reduce that unfunded liability portion by whatever method, then I think we ought to look at that,” he said. “I don’t think we ought to change the way we do it though, the system we have.

“Getting to 100 percent funded is a good cause, and I think we should try to do that,” Oceguera said.

Senate Majority Leader Steven Horsford, D-Las Vegas, said he could not comment because he has not yet read the report.

Senate Minority Leader Mike McGinness, R-Fallon, favors a change to a defined contribution plan for new hires but said he has not read the Segal report and so could not yet comment on the findings.

Assemblywoman Debbie Smith, D-Sparks, chairwoman of the Ways and Means Committee, said the report indicates what other such studies have said previously, that it would not be fiscally prudent to change the pension plan from a defined benefit to a defined contribution plan.

The Legislature has been attempting to address the unfunded liability, although budget problems in recent years have made that more difficult to accomplish, she said. It will be up for discussion at every legislative session, Smith said.

“I think the public employee benefit plans will certainly be under scrutiny; and making sure we have plans to fund them,” she said.

The 2009 Legislature did make some changes to the retirement plan for new hires in an effort to reduce costs, including increasing the retirement age to 62 for some workers.

The report released Dec. 15 says that to change to a defined contribution plan for new hires, the existing defined benefit plan will have to be fully funded over a shorter time frame, requiring increased contribution rates from the state and local governments and possibly employees as well.

A change from a “defined benefit” plan where retirement payments are guaranteed based on salary and years worked, to a “defined contribution plan” where public employers contribute to employee retirement without any guarantees of pension amounts upon retirement, is being pushed for public employee retirement plans nationwide.

Such a change would affect only future hires. There is a current legal prohibition for changing the plan for workers currently in the system.

Advocates for the current system say Nevada’s plan is well managed, is being funded appropriately and will be fully funded over time. Supporters of a change to defined contribution say it would eliminate any future unfunded liability and so benefit taxpayers.

Audio clips:

Assembly Minority Leader Pete Goicoechea says changing the public employee retirement system could have a big financial impact on state and local governments and employees:

122010Goicoechea1 :07 a tremendous impact.”

Goicoechea says a change to the system could generate a large number of retirements:

122010Goicoechea2 :09 until July 1.”

Assembly Speaker John Oceguera says lawmakers should work to close the unfunded liability rather than make sweeping changes:

122010Oceguera1 :13 that we have.”

Oceguera says getting the current plan 100 percent funded is a worthwhile goal:

122010Oceguera2 :04 to do that.”

Assemblywoman Debbie Smith says budget problems have delayed legislative action on the unfunded liability:

122010Smith :14 plate every session.”

  • Algy Moncrief

    WORSE THAN BERNIE MADOFF – COLORADO’S 2010 PENSION THEFT.

    What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.
    We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.
    If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?
    The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.
    Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.
    PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.
    Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.
    The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.
    Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)
    Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):

    Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
    Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
    Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
    Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
    Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
    Senator Spence said “The bill places an unfair burden on retirees.”
    Senator Scheffel said “We are breaching our promises to existing retirees.”
    Senator Lundberg said “This bill is a deal that was cut before this body met.”
    The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.
    So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.
    The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.
    Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.
    It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.
    Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.
    PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.”
    Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.
    Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.
    There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.
    Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.
    The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)
    PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.
    While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).
    The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.”
    Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.