CARSON CITY – Gov. Brian Sandoval is seeking significant changes to Nevada’s public employee pension plan in the 2011 legislative session to reduce the ongoing and long-term financial cost of the benefit to the state and taxpayers.
But if he wants fundamental change, he might look to the state university system’s retirement plan for faculty.
In all the talk of changes to the Nevada Public Employees’ Retirement Plan, which covers more than 102,000 current active state and local government workers, a separate plan for one small segment of Nevada workers – university and college faculty and professional administrators – has received scant attention.
This group of employees has its own defined contribution plan, the cost of which is shared equally by the Nevada System of Higher Education and the faculty and administrators. The current contribution rate is 11.25 percent from the employee and the same amount from the employer. It was created in 1970 following action by the Legislature in 1969.
About 4,600 Nevada higher education professionals participate in the defined contribution plan, while another 639, or 12.2 percent of the total, are in the PERS plan.
The 401(k)-style retirement plan is portable, meaning faculty can take their investments with them if the relocate. It is the type of plan used by most higher education systems across the country to provide a retirement benefit to faculty because they often relocate to other states as part of their academic careers.
Most importantly, because it is a defined contribution plan, where the employees are responsible for their investment choices, there is no liability to the Nevada higher education system, the state, or taxpayers. The contribution rates for the plan mirror those set for PERS participants.
“There is no accrued liability to the state or the institution under a defined contribution plan,” said Gerry Bomotti, senior vice president for Finance and Business at the University of Nevada, Las Vegas. “Basically the employee and the employer contribute. The employee basically has those resources for their retirement purposes. They have options with investments and the like.”
Bomotti said faculty preferences do tend to shift between the current 401(k)-type plan and the defined benefit option offered by PERS depending on how the markets are performing.
Individuals who manage their own retirement accounts can suffer more in major market downturns than the defined benefit plans managed by professionals.
Attention was first drawn to the plan by a “tweet” from Nevada Faculty Alliance Vice President and UNLV professor Greg Brown, who said: “Faculty have had 401(k)-style plan for decades, zero post-retirement liability for state, privately admin’d. #modelcitizens”
Brown said the professionals covered by the higher education retirement plan are highly educated and entrepreneurial and so have the ability to manage their own retirement accounts. Day-to-day management is handled by one of three firms providing investment opportunities.
“It is in my experience very popular,” he said. “It is part of the culture of the academic profession.”
But that might not be the case for all other classes of government employees who are covered by PERS, Brown said. If there is a decision to move to a defined contribution plan for all future public sector workers, there would have to be some assurances that the employees would have the capacity and opportunity to take on that oversight, he said.
Only three states, Alaska, Nebraska and Michigan, along with the District of Columbia, rely primarily on a defined contribution retirement plan rather than a defined benefit plan, based on 2009 data from the National Conference of State Legislatures.
The defined benefit plan offered by PERS is the more traditional type of pension, where workers get a guaranteed retirement based on salary and years of service.
But these types of plan have come under fire nationally because of the financial liability they create for states, particularly if they are underfunded. Nevada’s PERS plan was only 70.5 percent fully funded as of June 30, 2010.
Other states, including Utah, are looking at retirement plans that combine elements of both, as has been proposed by the Sandoval administration.
Dana Bilyeu, executive officer of PERS, said the retirement system has been approached by representatives of the university professors in the previous two legislative sessions asking to be able to participate in the plan. This is because the individual accounts maintained by faculty saw greater losses on a percentage basis in the recent market downturns than the PERS fund did, she said.
There is no authority under the current law to bring the group into the PERS plan, Bilyeu said.
James Richardson, director of the Grant Sawyer Center for Justice Studies and a UNR faculty member since 1968, said he believes Nevada’s public employee retirement system is one of the best managed and fiscally responsible in the nation. Richardson is not a member of PERS.
“One of the reasons the professionals want back in the (PERS) plan is that it is actually a very good plan,” he said. “It is being amortized out. All kinds of studies have demonstrated it is one of the top plans in the country in terms of its viability.”
Richardson said he would not advocate for a complete changeover to a defined contribution plan. Some states that have made this move are switching back, while others are looking at a combination of defined benefit and defined contribution as Sandoval is proposing, he said.
But the lack of a taxpayer liability is why many states are looking at defined contribution plans for their public employee pensions. The PERS plan had a $10 billion long-term unfunded liability as of July 1, 2010 that taxpayers are potentially on the hook for if the plan’s investments don’t hit targets or if contribution rates are not maintained at adequate levels.
Advocates for the current system say Nevada’s public employee retirement plan is well managed, is being funded appropriately and will be fully funded over time. They say no major changes are necessary.
But Sandoval says the threat to the state from the unfunded liability makes it necessary to move to a defined contribution plan from the defined benefit pension plan for future hires.
He is proposing a partial shift for newly hired state employees to a combination of a defined benefit/defined contribution plan. It would cut the amount the state contributes to an employee’s defined benefit retirement by about half to 6 percent. Employees would also pay half as much at 6 percent.
The result would be a much smaller benefit at retirement, but it would cut the state future pension liability by half as well.
Gerry Bomotti of UNLV says the faculty retirement plan carries no risk to Nevada taxpayers:
UNR faculty member James Richardson says some of his colleagues would like to join PERS in part because it is well managed: