CARSON CITY – A little-known benefit of Nevada’s public employee pension plan is the right to purchase up to five years of service towards retirement.
Referred to by some as “air time,” or the ability to add years of retirement without actually putting in the time in a public sector job, the benefit can allow state and local government workers to retire early, collecting annual pensions years before they would be eligible otherwise.
A 60-year old state worker with five years in the Public Employees’ Retirement System, could, for example, buy five years of retirement credit and retire right away with a pension worth about 25 percent of salary.
A 50-year-old teacher with 25 years of service could buy five years and retire right away with about 75 percent of salary. Regular public sector workers in Nevada can retire at any age with 30 years of service.
Former Clark County D.A. David Roger a case in point
An example of the use of air timewas reported recently by the Las Vegas Review-Journal concerning former Clark County District Attorney David Roger, who purchased five years of service and retired at age 50 to take another job. According to the newspaper, Roger paid about $330,000 to purchase the five years. He is now eligible for an annual pension of about $150,000 five years before he would be eligible otherwise.
But the cost of purchasing a year of retirement credit is not cheap, and a review of such purchases in Nevada suggests it is not used all that frequently by public employees.
Even so, some state lawmakers say the benefit, along with other aspects of the public pension program in Nevada, are worthy of review in the 2013 legislative session.
The 2011 Legislature approved a study of the public employee retirement system, but a $250,000 private sector donation was required before the review could get under way. The contribution has yet to materialize.
The primary interest for many policy makers, including Gov. Brian Sandoval, is whether Nevada’s public employee pension plan should be changed from a defined benefit plan to a defined contribution plan, similar to a private sector worker’s 401(k), for new public workers going forward.
Air time purchases are offered in many states
Some states make it much less costly for public workers to purchase retirement credits. The ability to buy “air time” was recently highlighted in a news report in USA Today, which found 21 states that allow for such purchases.
Numbers provided by PERS to the Nevada News Bureau shed some light on the use of the benefit.
About $17.2 million was spent on purchase of service in fiscal year 2011, not counting a special program created by the Legislature for teachers who work in at-risk schools. This represents about 1.2 percent of the $1.4 billion in total contributions made to PERS that year from both public employers and employees.
In fiscal year 2010, the number was $13.5 million out of $1.4 billion in total contributions or just under 1 percent.
These amounts may include some purchases of service by a local government in order to encourage workers to retire as a way to save money in the budget.
The Washoe County School District last week, for example, approved 68 early retirement applications to help resolve a $40 million budget shortfall.
The PERS website has a calculator to show what it would cost to buy a year of service. Based on the average salary for all active regular employees of $49,000, it would cost a worker nearly $20,000 to buy one year of service at age 55.
For a police officer or firefighter with an average salary in 2011 of about $74,000, the cost to buy one year of service at age 55 would be nearly $30,000. Public safety employees can retire at any age with 25 years of service.
So dividing these amounts into the $17.2 million in purchase of service in 2011 would equal 860 years of service purchased if all the purchases were by regular employees. For police and fire, the number of years purchased would be about 573 years.
With nearly 100,000 active employees in 2011 and each earning a year of retirement credit for working, the number of purchases appears to be a small piece of the public employee retirement puzzle. The PERS system covers state workers, local government employees and school district personnel across the state.
Air time purchases not that common in Nevada
Dana Bilyeu, executive officer of PERS, said the agency does not collect data by individual on the purchase of service. Even if it did so, pension information about individual retirees has long been considered confidential, although this issue is now before the Nevada Supreme Court.
The Reno Gazette-Journal is seeking individual retirement information and won a court ruling in Carson City District Court in its favor. That ruling has been appealed to the Supreme Court by the PERS board.
But based on anecdotal evidence, Bilyeu said the purchase of service benefit is not used to any great degree of frequency by Nevada public employees.
“You can tell from the numbers that it is not a huge thing for us,” Bilyeu said. “We don’t have a lot of five-year purchases. We usually get purchases of 18 months or a year by an employee to get to 10 years to retire at age 60.”
An employee nearing 30 years of service might purchase a year or half a year to retire a bit early, she said.
The USA Today report said air time is coming under scrutiny as states try to curb retirement spending and make their pension systems resemble private-sector plans. Federal law allows air-time purchases only in government pension plans.
Nevada lawmakers may take up the “air time” issue next year
Assemblyman Randy Kirner, R-Reno, said the $17.2 million in air time purchases in 2011 may not seem large in the context of one year revenue for PERS.
“However, if one were to figure the benefit costs over a lifetime to be paid out, I suspect the resulting math would astound normal citizens who can never hope to have such a staggering benefit,” he said. “So it’s not the $17.2 million but the lifetime cost that’s important to consider. Paying $20,000 or $30,000 per year purchased may be insignificant to the lifetime benefit.
“Bottom line, Assembly Republicans have raised this and other related issues to PERS as potential issue for the 2013 session to address,” Kirner said.
Geoffrey Lawrence, deputy director of policy at the conservative think tank Nevada Policy Research Institute, said his concern with the purchase of service is that employees may not be contributing enough money to cover the cost of the additional retirement benefit.
When years are purchased, PERS assumes it will get an 8 percent return on its money, he said. If that target is not met over the long term, taxpayers could be on the hook to make up any shortfalls, Lawrence said.
“So if you’ve got a bunch of employees buying air time early in their career, and PERS doesn’t get the return that they are assuming, then taxpayers in ensuing years are going to have to make larger contributions into the account to pay back the unfunded liability,” he said. “So this is something that is of concern because it can exacerbate the unfunded liability.”
The PERS plan was 70.2 percent funded as of June 30, 2011.
But Lawrence said he isn’t surprised at the small amount of money going to purchases because most employees probably don’t have $20,000 or more to buy a year of service.
Geoffrey Lawrence of NPRI says taxpayers could be on the hook for air time purchases if the pension plan doesn’t hit its investment target:
Lawrence says the low use of the program is not surprising: