Posts Tagged ‘Bilyeu’

Assembly Panel Hears Bill Seeking Modest Reforms To Public Employee Retirement Plan

By Sean Whaley | 11:50 am April 13th, 2011

CARSON CITY – The Nevada Legislature finally took up the issue of reforms to the state’s public employee retirement system today, but the proposed changes from Democratic Assembly Speaker John Oceguera are modest.

Oceguera spoke in support of Assembly Bill 405, which would eliminate call-back pay as a form of compensation used to compute retirement benefits for new government workers hired starting Jan. 1, 2012. Call-back pay is used when certain police officers or fire fighters are called back to work in an emergency.

It also proposes that the Legislature make no changes in benefits to the Public Employees’ Retirement System (PERS) for 10 years unless necessary to maintain the financial integrity of the plan. After 10 years, the Legislature would not enact any benefit increases unless the system’s long-term unfunded liability was at least 85 percent funded.

The plan is currently 70.5 percent funded.

Oceguera said his changes would bring down the liabilities of the plan while increasing the predictability of the system, which covers virtually all state and local government employees in Nevada.

Oceguera said the Legislature made major changes to the PERS plan in 2009, and those changes need time to take effect. The 10-year moratorium on any changes would allow the system to assess how those reforms are affecting the long-term liability, which stood at $10 billion on June 30, 2010.

Local government and business representatives supported the proposed changes, while some public employee labor groups spoke in opposition. The panel did not take immediate action on the bill, which faces a Friday deadline for passage.

Gov. Brian Sandoval has advocated for a major change to the retirement system to begin work on reducing the unfunded liability of the plan, but he did not introduce a bill this session addressing the issue.

Heidi Gansert, chief of staff to Sandoval, said the administration would participate in a debate on reforms to the retirement plan as bills dealing with the system came up for hearing, but no one from the governor’s office testified on AB405.

Supporting the bill were Ted Olivas, representing the city of Las Vegas, and Tray Abney, with the Reno-Sparks Chamber of Commerce.

Ron Cuzze, representing the Nevada State Law Enforcement Officers’ Association and the Nevada Association of Public Safety Officers, spoke in opposition to the measure, saying the proposed change to call-back pay is a “knee-jerk reaction” to a “group of individuals” in the public employee system that defrauded the taxpayers.

Cuzze was referring to allegations of sick leave abuse by some Clark County fire fighters.

Rusty McAllister, representing the Professional Fire Fighters of Nevada, said the proposed changes in the bill are modest, but that no reforms should be advanced without a discussion of Nevada’s revenue system.

The changes to PERS agreed to in 2009 were made in exchange for the temporary tax increase approved by lawmakers to help fund the current two-year budget, he said.

“We traded, if you will, permanent changes to the PERS and the collective bargaining system for temporary changes in the revenue structure in the state,” McAllister said. “And certainly, we would hope that if this is going to move forward, that this could again be part of a discussion, but part of a discussion as a permanent fix to the revenue stream and not just continuing to pile permanent fixes on the public employees while we have temporary fixes to our problems.”

Sandoval has repeatedly rejected any call for new taxes or fees to balance his $5.8 billion general fund budget.

Dana Bilyeu, executive officer for the retirement system, said her board has not yet taken a position on the bill. Staff will recommend a neutral position on the benefit change, and an endorsement of the legislative pledge for no benefit modifications for 10 years. The proposal mirrors the system board’s funding policy in effect now, she said.

Audio clips:

Assembly Speaker John Oceguera says major reforms to the public employee retirement system were approved in 2009:

041311Oceguera1 :11 is significant change.”

Ron Cuzze, representing Nevada law enforcement, says the change in call-back pay is a knee-jerk reaction:

041311Cuzze :25 doesn’t make sense.”

Rusty McAllister, representing Nevada fire fighters, says further PERS reforms should only be made in exchange for dealing with the state’s revenue problems:

041311McAllister :29 to our problems.”


Is Nevada’s Higher Education Retirement Plan A Pension Reform Model?

By Sean Whaley | 9:33 am March 8th, 2011

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.

Audio clips:

Gerry Bomotti of UNLV says the faculty retirement plan carries no risk to Nevada taxpayers:

030711Bomotti :22 and the like.”

UNR faculty member James Richardson says some of his colleagues would like to join PERS in part because it is well managed:

030811Richardson :16 of its viability.”

Report Says Change To Nevada Public Retirement System Would Mean Big Upfront Costs

By Sean Whaley | 2:27 pm December 15th, 2010

(Updated at 4:31 p.m. on Dec. 15, 2010, to include comments from NSEA)

CARSON CITY – The panel that oversees Nevada’s public employee retirement system was told today 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.

The increased costs would come about as the Public Employees’ Retirement System moved to fully fund the existing plan for current state workers and retirees who would remain in the defined benefit plan.

The increased funding would have to continue over the next several years, adding costs to state and local government budgets. While the cost of the current retirement plan is shared between workers and their government employers, Dana Bilyeu, executive officer of PERS, said employers might end up having to bear the entire increased cost.

“Probably the entire cost would be borne by the employer because the employees are going to say, ‘hey, wait a minute, you’ve unilaterally made a decision to change the financing here and I’m now penalized because of that’,” she said.

The report by the Segal Group Inc., the PERS actuary, was prepared for the retirement board at no additional charge. It was accepted by the board and will be forwarded to the Legislature and Gov.-elect Brian Sandoval for their consideration at the 2011 legislative session. The board took no position on the report or the suggestion to switch to a defined contribution plan.

Sandoval and some lawmakers have advocated a change to a defined contribution plan for new hires as a way of containing a long-term unfunded liability for the current defined benefit plan, which hit $10 billion as of June 30.

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 eliminate the unfunded liability for 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.

The unfunded liability number won’t be recalculated until next year, but Bilyeu said today the PERS investment portfolio is up 13.6 percent since July 1, and assets total about $23.7 billion.

Members of the PERS board heard today that making the switch would result in significant upfront costs to the state and local governments as the current plan would be closed to new members and it would have to be fully funded over a shorter period of time.

Bilyeu said the change could be compared to switching from a 30-year mortgage on a home to a 15-year payoff, resulting in higher payments. In the case of PERS, the amortization schedule would shrink from the current 25.5 years to an average of about 10 years, she said.

The Segal Group report cites a number of advantages and disadvantages of defined contribution plans. Defined contribution plans would likely require employees to manage their own investments, and they are frequently drawn down by workers before retirement. They do not include cost-of-living increases to maintain purchasing power.

For government entities and taxpayers, however, eliminating any potential future unfunded liability is a major plus of such plans.

But there is a cost to making such a change. 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.

Gary Peck, incoming executive director of the Nevada State Education Association, said a preliminary review of the Segal report suggests any transition to a defined contribution plan for Nevada public employees in the upcoming legislative session has the potential to become a “train wreck.”

“Based on what we have read so far, it is plainly a red light, not a yellow light, that we hope the governor will pay attention to,” he said.

Craig Stevens, director of government relations for the NSEA, said the costs associated with such a transition make the idea fiscally imprudent right now.

“The price tag is too large at the moment,” he said. “There are philosophical reasons why we advocate for a defined benefit plan for our members, but from a fiscal point of view it makes no sense (to change). We can discuss the merits, but now is not the time.”

Carole Vilardo, president of the Nevada Taxpayer’s Association, has questioned whether state and local governments can afford to make the changeover in the next legislative session because of the costs and the current financial problems facing the state. While advocating for the switch, Vilardo said in an interview on Nevada NewsMakers last week it might have to wait four years.

Audio clips:

PERS Executive Officer Dana Bilyeu says changing to a defined contribution plan would require the current plan to be fully funded more quickly:

121510Bilyeu1 :12 about 10 years.”

Bilyeu says government employers might end up having to pay all of the increased costs of funding the current plan:

121510Bilyeu2 :12 because of that.”

Nevada Public Employee Retirement Contributions To Increase, Unfunded Liability Climbs To $10 Billion

By Sean Whaley | 12:57 pm November 10th, 2010

CARSON CITY – Nevada’s public employee retirement system will require increased contributions from the state and local governments next year to maintain the long-term financial health of the defined benefit plan, the board overseeing the program was told today.

The contribution rate for regular employees will have to increase by 2.25 percentage points to 23.75 percent in the coming two years. The retirement system covers 103,000 active public employees, including state workers, teachers and local government employees.

Police and fire fighters will also see an increased contribution rate of 2.75 percentage points to 39.75 percent. This group of workers is evaluated separately.

The increases, recommended by an independent consulting actuary, were adopted by the Public Employees Retirement System Board and forwarded to the state budget director and Legislature.

The 2011 Legislature will be asked to fund the increased retirement costs. Lawmakers in past sessions have fully funded the contribution rates recommended by the actuary and the retirement board.

The increases will be shared by employees and employers. Regular state employees who pay half of the total contribution will see 11.875 percent of their salary go to their retirement starting July 1, 2011, up from the 10.75 percent now.

The increase will mean a slight salary reduction for state workers at a time when cost-of-living increases have been eliminated and unpaid furloughs implemented because of the state’s dire budget situation. These cost-cutting measures are expected to continue in the next two-year budget.

The amounts paid by school district and government employers and their employees depend on the results of collective bargaining negotiations. A 50-50 employee-employer match is required, but local governments have in the past paid a bigger share of the contributions in lieu of salary increases. State employees do not have the right to collective bargaining.

Dana Bilyeu, executive officer of PERS, said the actual cost of the increase to the state and state employees will be $8.7 million each in fiscal year 2012 and 2013 based on estimates by her agency. This compares to an annual $9.3 billion state budget in 2010 when all funds are included, she said.

For the entire system statewide, the cost of funding the program equates to 2.4 percent for public employers and another 2.4 percent for public employees based on total public government budgets of $27 billion, Bilyeu said.

Claims that public employee pension costs are going to sink government budgets are exaggerated, she said.

The PERS board was also told, however, that the long-term unfunded liability of the state public pension plan grew in the fiscal year that ended June 30, to $10 billion from $9.1 billion as of June 30, 2009.

The plan was 70.5 percent fully funded on June 30, 2010, down from 72.5 percent in the previous year. At its high point in 2000 the plan was 85 percent funded.

These long-term unfunded liabilities of the PERS plan and for public employee pension plans nationwide are generating concern from policy makers.

Nevada Gov.-elect Brian Sandoval said today he remains convinced the PERS system needs to 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.

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

A report on a shift to a defined contribution plan for future hires will be presented to the PERS board in December.

Bilyeu is not advocating such a change to the board or to the Legislature but recommended the analysis to provide the information to lawmakers and the governor.

Not all elected officials are convinced Nevada’s public pension plan needs such a change.

Lawmakers in 2009 did make some changes to the PERS system to control costs, including raising the retirement age for new employees to 62 from 60.

But there is a growing chorus of critics who say more drastic changes are needed to reign in pension costs or government entities will soon face bills they cannot pay.

A study of state and local government pension funds by the Pew Center on the States released in February identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan.

Geoffrey Lawrence, a fiscal policy analyst with the Nevada Policy Research Institute, said in an article this week that PERS officials are understating the implications of the unfunded liability.

“In the event that PERS’ assets become insufficient to make the promised benefits payments to retirees, the shortfall would almost certainly be filled using tax dollars,” he said.

Lawrence noted that between fiscal year 2000 and fiscal year 2009, PERS’ unfunded liability nearly quadrupled, growing from $2.3 billion to $9.1 billion.

“Moreover, as NPRI has noted, even this amount is dramatically understated because PERS accounting methods fail to consider the price of risk or instability in the marketplace,” he said. “PERS administrators assume that, like clockwork, they will be able to realize an 8 percent annual return with zero risk in the portfolio.”

Bilyeu said the PERS investments do assume an annual rate of return over time of 8 percent. The plan has averaged a 9.3 percent rate of return over the past 25 years, she said. The 8 percent rate of return on investments assumption will be evaluated in 2012.

Bilyeu acknowledged the concerns over the solvency of public employee retirement plans nationwide, but said Nevada’s plan has been regularly funded based on the independent actuarial valuation performed every two years.

Pension funding concerns are legitimate for those plans that are not fully funded every year based on actuarial analyses, such as those in Illinois, New Jersey and some other states, she said.

Nevada Public Employee Pension Investment Return Exceeds Short Term Target But Unfunded Liability Still Growing

By Sean Whaley | 1:13 pm September 2nd, 2010

(Corrected at 2:34 p.m. on Sept. 2, 1010 to reflect average monthly benefit paid to retirees.)

CARSON CITY – Nevada’s public employee pension system earned a rate of return above its 8 percent target last fiscal year, but the long-term unfunded liability is still expected to see an increase when an analysis is presented this fall.

Dana Bilyeu, executive officer of the Public Employees’ Retirement System (PERS), said the retirement board was pleased to learn earlier this month that the return on the plan’s investment hit 10.8 percent for the fiscal year 2010 that ended June 30. This is above the plan’s assumption of an 8 percent return over time, which the PERS plan has achieved.

But the PERS portfolio, a mix of stocks, bonds and other investments worth $22 billion as of June 30, is still accounting for the 15.8 percent loss in the 2009 fiscal year, she said.

The plan, which covers more than 105,000 active state and local employees, including teachers, was 72.5 percent fully funded as of the end of the 2009 fiscal year, down from a high of 85 percent in 2000. The unfunded liability totaled $9.1 billion last year.

Bilyeu said she expects to see that unfunded liability increase a bit when the system’s actuary provides the 2010 data this fall because of the 2009 loss.

The long-term liabilities of public pension plans have become a concern nationwide, with some states doing a much worse job of funding their plans than others. One national study identified Nevada as one of 21 states struggling with funded liabilities of less than 80 percent in 2008.

Some national studies using a different method of calculation suggest the pension plans, including Nevada’s, are unfunded to a much greater degree than what is being officially reported.

Bilyeu said Nevada’s plan is funded based on projections by an independent actuary that must be used by the retirement board. There is a likelihood that the contribution rates will have to go up by 1 or 2 percentage points in the next biennium to ensure the continued solvency of the plan over a 30-year time frame, she said.

The plan is currently funded at a 21.5 percent contribution rate for regular employees, with government entities and employees sharing the cost. The contribution rate for police and fire fighters is higher.

Nevada’s plan has always been funded each year by the amounts set by its actuary, a requirement in the state constitution, Bilyeu said. While other states have employed various mechanisms to avoid making contributions to their plans, that has not been the case in Nevada, she said.

The most recent national attention on the public pension issue has come from New Jersey, where the U.S. Securities Exchange Commission accused state officials of fraud for saying they were properly funding the state’s pension plan when they were not. The matter was settled with a cease and desist order and no penalties were imposed.

But Geoffrey Lawrence, a fiscal policy analyst for the Nevada Policy Research Institute, said Nevada policymakers still must address the challenge of the long-term unfunded liability.

In a recent column about the New Jersey situation, he said: “The Nevada Legislature has, to the present, faithfully contributed tax dollars into the Nevada Public Employees’ Retirement System (PERS). However, PERS liabilities over the past decade have well outpaced the system’s assets, given the continued rise in public employee wages and retiree benefits based on those wages.”

Until public employee pay and the retiree benefits based on that pay are brought under control, or until lawmakers move to a rational, defined-contribution retirement plan, the state’s creditworthiness will continue to erode in direct proportion to its growing pension liabilities, Lawrence said.

The PERS popular annual financial report for fiscal year 2009 indicates that the average benefit payment for a regular employee was $2,428 a month, compared to $1,626 in 2000. The average retirement age was 61.

Bilyeu said the state retirement system is doing a cost study of converting to a defined contribution plan, where employees receive a set amount of money to invest each year, versus the current defined benefit plan, where employees are guaranteed a pension amount based on salary and years of service. The information will be presented to the board in the fall and forwarded to the governor and Legislature for their consideration, she said. The PERS board is not advocating for such a change.

Any such change would not apply to current employees vested in the plan, only to future hires.

GOP governor candidate Brian Sandoval has endorsed the idea of switching to a defined contribution plan. Democrat Rory Reid has not offered a position, saying concerns about the plan’s fiscal health must be studied first.

Las Vegas Chamber of Commerce President Matt Crosson said in an interview August 12 the Nevada business community will not accept tax increases in the upcoming 2011 legislative session without “meaningful” reforms in a number of areas including public employee benefits.

Steve Hill, chairman of the chamber’s state policy task force, said there are several options to solving the public pension issue for new employees going forward, among them: moving to a defined contribution plan; making significant changes to the existing plan regarding retirement ages and other factors to reduce benefits; and making social security part of the public employee retirement plan.

Nevada is one of only seven states that does not have its public employees in the social security system, meaning the state is liable for the entire retirement benefit package, he said.

But whatever the solution, it needs to be a long-term, permanent fix in 2011 that is fair to employees but is also rational and sustainable for taxpayers, Hill said. The chamber also believes the state should end the program of subsidizing health care for retired state employees starting with new workers, he said.

Fundamental changes won’t eliminate the current unfunded retirement system liability but they will stop it from getting worse, Hill said.

The good news is that legislative leadership is in discussions on how best to make the necessary reforms to employee benefits, he said.

“All of the leadership, and regardless of party and regardless of which house, are looking at this, these situations, and realize that something really needs to be done,” Hill said.

Audio clips:

Steve Hill of the Las Vegas Chamber says the Legislature needs to fine a fair but permanent fix to the public employee benefits issues next session:

083110Hill1 :21 ourselves into again.”

Hill says the employee benefits issues should be addressed so the solutions are sustainable over the long term:

083110Hill2 :35 a sustainable program.”

Hills says legislative leadership is working on solutions:

083110Hill3 :14 to be done.”

Study Says Unfunded Liability of Nevada’s Public Employee Pension Plan Vastly Understated

By Sean Whaley | 12:21 pm April 9th, 2010

CARSON CITY – If the idea that a $9.1 billion long-term unfunded liability in Nevada’s public employee pension plan is cause for concern, then a recent analysis by the American Enterprise Institute for Public Policy Research should really get the attention of state policy makers.

The study by Andrew Biggs, a resident scholar at AEI, says the methods by which unfunded liabilities are calculated by state and local government pension systems are inaccurate and do not show the real risk to taxpayers who will foot the bill if the funds fall short of cash to pay obligated retirement benefits.

A market valuation of pension shortfalls is more accurate and shows the real risk to state budgets and taxpayers, he said. This analysis shows there is only about a 40 percent probability that a fully funded pension plan will be able to pay retirement benefits when bills start to come due, he said. The probability is even lower for plans that are not fully funded, including Nevada’s, Biggs said.

For Nevada’s Public Employees Retirement System, which covers almost all public employees in the state, the shortfall using this analysis is closer to $33.5 billion as of June 30, 2008, Biggs said.

Nevada’s regular employee fund was 78 percent fully funded using the actuarial method of calculation, but only 42 percent fully funded using the market analysis, he said. For Nevada’s police and fire plan, the actuarial method shows it 71 percent fully funded, but only 38 percent fully funded using the market analysis.

The $9.1 billion number is the PERS estimate based on the actuarial method as of June 30, 2009. The actuarial method is currently the accepted practice for pension plans.

Biggs doesn’t quibble with the assumption by the Nevada plan that it will get an 8 percent return on its investments over the long term. But that doesn’t mean the plan will earn 8 percent over a shorter period of time. Annual returns can fluctuate widely, he said.

The actuarial method of calculating the unfunded liability does not include any risk factor, Biggs said.

“For an economist this doesn’t compute,” he said.

His report says: “Current pension accounting methods report plans’ funding shortfalls assuming that pension investments in stocks, bonds, hedge funds, and private equity will produce forecasted rates of return with certainty. Market-valuation methods account for the uncertainty inherent in such investments by recognizing that risky investments cannot produce a guaranteed return.”

“They act as if they can earn 8 percent without any risk, and they can’t,” Biggs said in a telephone interview. “The government has to pay the bills when they come due and they are coming due soon. Baby boomers are retiring from government jobs just as they are in the private sector.”

Without knowing the true cost of the unfunded liability, governments can’t prepare for the day when these funds will likely be in financial trouble, Biggs said.

Biggs said the inadequacy of these pension funds will likely emerge at the worst possible time, when there is an economic downturn and high unemployment making it difficult for state to raise taxes or borrow money to pay the legally obligated benefits.

“It needs real reform,” he said. “Otherwise we will find out the numbers were wrong too late, and the plans should have been properly funded 20 years ago.”

Dana Bilyeu, executive officer of PERS, does not dispute Biggs’ method of calculating the shortfall, but said the actuarial method now being used is the accepted practice for public pension plans. The market analysis used by Biggs has not been accepted by the actuarial profession, she said.

“It is a school of thought related to pension funding,” Bilyeu said. “It is not the majority opinion.”

Bilyeu said the concept suggests that the 8 percent anticipated return carries risk, and that a safer approach would be to use a lower, more conservative number. Changing the assumption to a 4.5 percent return, for example, would of course cause the unfunded liability to balloon to a much higher number, she said.

Bilyeu said the 8 percent projected rate of return is the result of significant analysis that shows the rate is achievable over both the long term and the capital market cycle. Payments are made into the plan each year by public employers and employees based on assumptions made by the PERS board, which in turn are based on recommendations from an actuarial firm, to ensure there is enough funding to pay benefits as they come due, she said.

“I’m happy to disclose at 4 percent or 8 percent or our actual return over 25 years of 9.4 percent,” Bilyeu said.

But making such a radical change to the PERS plan would be disruptive, she said.

“I do object when they say we’re not doing it right,” Bilyeu said. “We follow generally accepted actuarial practices.”

Bilyeu did note, however, that the Governmental Accounting Standards Board is currently reviewing pension accounting and financial reporting standards. A comment period is under way, and changes will likely be coming forward by 2013, she said.

Nevada will of course comply with any changes, Bilyeu said, “But the process needs to be deliberative.”

Biggs also talks about the issue of “smoothing” in his report, where annual market returns are averaged over time, which can mask a bad year in the market. Nevada uses a five-year smoothing period, and this average is used by actuaries to set contribution rates to pension plans, he said.

While a concern, smoothing pales in comparison to the need to accurately reflect the real long-term unfunded liability, Biggs said.

Biggs said a move to a defined contribution plan for new government employees is an option to address the pension funding issue going forward, but it does not eliminate the unfunded liability for current public employees and retirees.

Accurate reporting will give policy makers the information they need to ensure the long-term viability of such plans, he said.

Nevada’s Public Employee Pension Plan Has $9.1 Billion Unfunded Liability

By Sean Whaley | 2:49 pm March 17th, 2010

CARSON CITY – Nevada’s political leaders have emphasized repeatedly in recent months that the state faces a huge funding shortfall in 2011, perhaps as much as a $3 billion hole that will make the recent special session battle over cuts and new revenues pale by comparison.

But the state faces another financial challenge that some suggest may be even more difficult to address: a public employee pension system that has an unfunded liability of $9.1 billion as of June 30, 2009.

A recent study of state and local government pension funds identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan. Nevada’s plan, where annual contributions by the state, local governments and public employees are invested in stocks, bonds and other instruments, is less than 80 percent fully funded, according to the examination by the Pew Center on the States issued in February 2010.

The study concluded in part: “In the midst of a severe budget crisis – with record-setting revenue declines, high unemployment, rising health care costs and fragile housing markets – state policy makers may be tempted to ignore this challenge. But they would do so at their peril. In many states, the bill for public sector retirement benefits already threatens strained budgets. It will continue to rise significantly if states do not bring down costs or set aside enough money to pay for them.”

The analysis by the Pew Center on the States found that as of Dec. 31, 2008, Nevada’s pension liability totaled $30.6 billion for current employees and retirees, with $7.3 billion of that amount unfunded for a 76 percent funded rate.

Dana Bilyeu, executive officer of the Public Employees Retirement System (PERS), said that unfunded liability is now at $9.1 billion. At its high point the plan was 85 percent funded in 2000. It now stands at 72.5 percent.

Bilyeu says the long-term liability will be funded over the next three decades and that major changes to the plan are not needed. The plan is being funded annually to the tune of $1.3 billion in contributions from all participating state and local governments and their employees, and those contribution rates are reset every two years to ensure it remains on strong financial footing, she said.

“To me, when you talk about public pension plans being in jeopardy, you need to focus on places where they are ignoring their responsibilities,” Bilyeu said.

Both Illinois and Washington state, for example, take contribution “holidays” where money that is supposed to go into the retirement plans is diverted to other uses, she said.

While the recent downturn in the market had a significant negative effect on the plan, people must remember that it is managed on a 60-year basis, not on a five- or 10-year time frame, she said.

“You either believe in the long-term financing approach or you don’t,” she said. “Nevada has embraced the long-term financing approach.”

Not everybody agrees with Bilyeu’s optimistic assessment. The Las Vegas Chamber of Commerce and the SAGE Commission, a panel established by Gov. Jim Gibbons to find efficiencies and save money in state government, have both recommended reforms to reduce the cost of the public pension system.

Cara Roberts, director of public relations for the Chamber, said regardless of state funding or the current economic climate, the state and local governments are providing benefits not found in the private sector.

“These promises we make do indeed have a real long term cost,” she said. “I suppose if there is a silver lining to the budget crisis, it is that fact we’re finally coming to the realization of where our taxes are actually going and whether those decisions truly reflect our priorities.”

The Pew report says there is a risk to states as they work to fully fund their plans due to market downturns such as the 2008 meltdown. Another issue is whether the generous retirement benefits provided by many of the plans, including Nevada’s, is siphoning limited tax revenues away from programs and services including public education.

While many Nevada officials and others believe there is a need to reform Nevada’s pension plan, they also acknowledge such reforms will be difficult to achieve. There has been a general consensus among many policy makers that changing the plan for current employees would not be fair since they entered the public sector workforce with certain expectations about retirement. Any changes made going forward for new employees only will take decades to bring about any definitive results.

Bilyeu said besides the fairness issue, there is a legal prohibition on making changes to the plan for current employees. Contributions made by employees are a form of deferred compensation, and altering the agreement with them would violate the contracts clause of both the U.S. and state constitutions, she said. The Nevada Supreme Court has issued an opinion on this issue, Bilyeu said.

Lynn Hettrick, deputy chief of staff to Gibbons, said one solution would be to change the plan from a “defined benefit” plan, where a specific pension amount is guaranteed on retirement, to a “defined contribution” plan, where set amounts of funds are contributed. This is the way most private companies operate, he said.

Usually in such plans the employee is responsible for making investment choices and so there would be no long-term liability on behalf of the state or local government.

But that is unlikely to occur in the short term because of the economy, he said.

“I don’t think we can get there right now,” Hettrick said.

Shifting to a defined contribution plan for new employees would require the state to cover the current unfunded liability in the defined benefit plan, which would then be closed to new participants and phased out over time.

“Given the current financial situation, that is not going to occur,” he said.

Hettrick said Gibbons does want to address the unfunded liability issue, but in the 2011 session, it may be a situation where some less sweeping changes are proposed, such as setting a minimum retirement age at 62 for all retirees. But if such changes are made on a going-forward only basis, such as those approved in 2009, there won’t be any short-term fix to the unfunded liability, he added.

“We need to bare bones the program and still provide a reasonable retirement,” Hettrick said. “People are living longer and working longer.”

Hettrick said also the Pew Study makes it clear the unfunded liability issue must be addressed by the governor and Legislature.

Assemblyman Ty Cobb, R-Reno, is one lawmaker who is skeptical of Bilyeu’s optimistic view of the health of the plan. He proposed the creation of a defined contribution plan in the 2009 session as some states have already done, but his bill did not get a hearing in the Democrat-controlled Assembly.

“The director of the system keeps saying, no matter what the outlook, that we’re doing fine, don’t worry about it,” he said. “But we have a huge unfunded liability, and we have to account for it.”

As to the Pew study, Cobb said most lawmakers and policy makers have known for some time the unfunded liability is a concern that needs attention.

But there is too much focus on partisan politics in the Nevada Legislature and not enough on major policy issues, he said. A change in the current climate would have to come from the grassroots level, Cobb said.

This is the first in a series of stories about Nevada’s public employee pension system.


Audio files from this story

[Audio][3 files]: Bilyeu on long-term financing; Hettrick on Government Action; Hettrick on Pew Study