Posts Tagged ‘defined benefit’

National Group Calls On Nation’s Governors To Freeze Defined Benefit Pension Plans For Public Workers

By Sean Whaley | 2:48 pm February 20th, 2012

CARSON CITY – A national nonprofit organization seeking fundamental reforms to state budgeting today sent a letter to the nation’s governors urging them to follow General Motors’ lead and freeze defined benefit pensions for all public employees.

Bob Williams, a former Washington state lawmaker and president of State Budget Solutions (SBS), sent the open letter, which was in response to General Motors announcement last week that on September 30, 2012, they will freeze the defined benefit pension plans of all salaried workers in an effort to hold down expenses.

GM’s announcement will affect 19,000 salaried workers hired before 2001, who will move from traditional pension with guaranteed payments to a 401(k)-type plan with contributions based on salary and bonuses.

Bob Williams, president of State Budget Solutions.

“It is time for state government to accurately account for and begin reducing massive deficits,” Williams said in the letter. “By freezing defined benefit pensions, you are taking one step closer to truly balancing budgets. Our nation can no longer ignore the realities and push our budget problems onto future taxpayers. Corporate America isn’t always right, but eventually they have to acknowledge the light of reality. GM is a beacon that your administration must follow.”

Nearly all of Nevada’s public employees are members of the Public Employees’ Retirement System, which offers a defined benefit plan upon retirement.

Gov. Brian Sandoval supports a change to a defined contribution plan for future state workers, but the issue did not get much attention in the 2011 legislative session. It is expected to come up again in the 2013 legislative session.

Sandoval favors a change to the retirement plan because of a concern about the potential taxpayer liability for the defined benefit plan. The long-term unfunded liability is estimated at about $11 billion, although some assessments using different measures put it at a much higher amount.

Williams said in his letter that a State Budget Solutions’ compilation of academic studies shows that the total unfunded pension obligation for state and municipal governments is at least $4 trillion based on common actuarial assumptions.

“Across the country, states have understated their true unfunded pension liabilities because lax government accounting rules allow it,” Williams said. “As a result, the plans are severely underfunded and will adversely impact every state budget for decades. Without major reform now, those liabilities will continue to grow.”

In a telephone interview today, Williams said one reason for the growing size of the obligation is the unrealistic rates of return assumed by public pension plans. Nevada assumes an 8 percent return, which it has achieved over the life of the plan.

“But over the last 10 years (the nation’s public pension plans) only averaged about a 3.5 percent, so once you don’t make that annual return then you have to make that up and there is no way the states are,” he said.

The private sector is facing the reality that the defined benefit plans cannot be sustained, Williams said.

The day of reckoning is coming, he said.

“I think it’s going to really wake us up when it probably hits either New Jersey, Illinois or California first,” Williams said. “I mean those are the states that just have an unbelievable unfunded pension obligation. But why not take action when you can.”

There has been a growing call nationally to move public pension plans to a state to a defined contribution plan, similar to a 401(k)-type plan, from the current defined benefit plan, where retirees are paid a set amount per month based on salary and years of service.

Nevada PERS officials say the current state plan is actuarially sound, and that the unfunded liability will be covered over time. They also note that the contribution rates required to keep the plan healthy are set by an independent actuary and are fully funded by the Legislature. The Legislature also made several changes to the existing PERS plan in 2009.

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Audio clips:

Bob Williams, president of State Budget Solutions, says the public pension plans face obligations of more than $3 trillion:

022012Williams1 :29 the states are.”

Williams says the issue could rise to national concern when a major pension plan hits a crisis point:

022012Williams2 :13 when you can.”

 

Author Of New Public Pension Reform Report Says Radical Changes Needed To Protect Taxpayers

By Sean Whaley | 2:34 pm September 28th, 2011

CARSON CITY – Scott Beaulier is no fan of states borrowing money, but in his new working paper on transitioning public pensions to 401(k) style plans to reduce taxpayer liabilities to pay retirement benefits, the Troy University professor says it is an option worth considering.

In his paperFrom Defined Benefit to Defined Contribution” for the Mercatus Center at George Mason University, Beaulier said the benefits of paying the upfront costs of transitioning pension plans from defined benefit, where employees are guaranteed a set amount at retirement, to defined contribution, where employees are responsible for their investment choices, outweigh the disadvantages.

“The borrowing should be one-time, and it should total the present value of all future payments owed to all retirees who do not transition to the 401(k) system,” Beaulier said in his report released earlier this week.

Scott Beaulier, author of Mercatus study on public pension reform.

The state of Michigan opted to borrow when it converted to a defined contribution plan in 1997, he said.

“Thanks to one-time borrowing, the transition was a smooth one, and Michigan covered with debt the billions of dollars in defined benefit liabilities that it was responsible for paying,” Beaulier said. “The move, which involved taking on debt and significant political risk, has proven successful and has saved Michigan taxpayers billions of dollars in unfunded liabilities.”

Beaulier is executive director of the Manuel H. Johnson Center for Political Economy at the Sorrell College of Business at Troy University in Alabama.

Defined benefit plans create long-term liabilities for states and taxpayers, while defined contribution plans carry no such risk. Because of this, and the concern over the health of public pension plans nationwide, there is a growing chorus of groups advocating for the change.

Nevada lawmakers plan to study the PERS defined benefit retirement plan that covers most state and local government employees in the next 16 months before the 2013 legislative session. The legislation authorizing the study allocates $250,000 from the general fund, but requires a $250,000 match from outside sources before the work can begin.

Gov. Brian Sandoval has advocated for a switch for new employees to a defined contribution 401(k)-type retirement plan to address the long-term liability concerns.

Supporters of Nevada’s existing defined benefit plan, including public employee groups and many lawmakers, say it is well managed and will be fully funded over time. They argue no such major changes are needed.

Nevada’s Public Employees’ Retirement System had an analysis performed of the costs of switching to a defined contribution plan for new employees in 2010. The report by the Segal Group Inc., the PERS actuary, said it would cost $1.2 billion in just the first two years to begin making such a transition.

The costs are due to the need to fully fund the existing defined benefit plan for current state employees. One option would be to raise contribution rates paid by public employers and their employees, but the cash-strapped state and local governments would be hard-pressed to come up with the money to pay for it.

In an interview with the Nevada News Bureau, Beaulier said: “Those costs have to be incurred because when you reform usually what you’re doing is offering new retirees the option to go with defined contribution. But by becoming fully funded you’re guaranteeing all of those pensioners who are retiring in the future under the old system that guarantee that their money will be there.

“Borrowing in this case would actually make a lot of sense because it is borrowing to put us on a much more sane fiscal path,” he said. “So one-time borrowing that says we are converting from defined benefit to defined contribution would be a way to deal with this.”

If revenue can be found elsewhere, such as selling off resources, that would be preferable, Beaulier said. Or participants could contribute more to help fully fund the plan as well, he said.

Nevada’s existing public employee retirement 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.

A study of state and local government pension funds by the Pew Center on the States released in February of 2010 identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan.

Beaulier said the key to ensuring taxpayers don’t end up on the hook for billions in pension payments when the plans run out of money is to make the change to defined contribution.

There are problems with making such a transition, one example being if a state issues bonds to finance the up-front costs, he said. A state would have to find the money needed to repay the bonds.

But making modest changes to the existing plans, as the Nevada Legislature did in 2009, is not enough, he said.

“I think that the fiscal challenges are forcing state administrators to look closely at how to shore up the financing of their defined benefit plans,” Beaulier said. “But my guess is most of them are just going to chip away at the promises that have been made and not engage in the kind of radical reform that is needed.

“Maybe some of them need to be asking: ‘How do we save taxpayers a lot of money long term,’ ” he said.

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Audio clips:

Mercatus public pension study author Scott Beaulier says the upfront costs have to be paid to transition to a defined contribution plan:

092811Beaulier1 :26 will be there.”

Beaulier says borrowing to make the transition makes sense:

09281Beaulier2 :16 deal with this.”

Beaulier says the political realities are that not all states will make the reforms that are needed:

092811Beaulier3 :19 that is needed.”

National Group Provides “How To” Guide To Reform Public Pension Plans

By Sean Whaley | 9:25 am September 15th, 2011

CARSON CITY – As Nevada policy makers get set to examine the state’s public employee pension plan in advance of the 2013 legislative session, a new report from the Center for State and Local Government Excellence offers some timely advice on how other government agencies have accomplished the difficult task.

The study highlights how three states, one county and one city have reformed pension plans to make them more fiscally sustainable while still providing retirement security to their employees.

Questions about whether the nation’s public pension plans are properly funded are being raised because of concerns taxpayers will ultimately be on the hook to pay retirement benefits if the plans run out of money.

A 2010 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.

“Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms” covers reforms implemented in Iowa, Oregon, Vermont, Gwinnett County, Ga., and Houston, Texas. It offers lessons for other reform-minded governments on plan funding and governance, the importance of using good data from experts, communication, and employee financial education.

Elizabeth Kellar, president and CEO of the center, said in a Wednesday telephone conference that states are making reforms to their retirement plans. According to the National Conference of State Legislatures, 25 states made significant revisions to at least one pension plan in the first six months of 2011. Thirty-nine states have made significant revisions to their pension plans in the past 18 months, she said.

Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence.

The Nevada Legislature made several modest reforms to PERS in the 2009 session, raising the retirement age from 60 to 62 for 10 years of service and reducing the amount of retirement credit per year of service, for new employees hired starting Jan. 1, 2010.

Despite the major reforms, the nation’s 126 largest public pension plans in the organization’s database have $2.7 trillion in assets, but $800 billion in unfunded liabilities as of 2010, Kellar said.

“This report gives some important lessons learned for places that are looking at significant reforms,” she said.

Gov. Brian Sandoval proposed major changes to the Public Employees Retirement System early on in the 2011 legislative session, recommending a switch from a full defined benefit plan where retirees are guaranteed a level of retirement income based on wages and years of service, to a hybrid that included a defined contribution element as well. The proposal, aimed only at new government employee hires, did not get introduced, however.

Instead, Sandoval and lawmakers agreed to conduct a complete analysis of PERS to generate the information they need to consider changes to the plan to reduce the $10 billion long-term unfunded liability. The study must include recommendations with actuarially-sound alternatives.

Sandoval has advocated for major changes to the retirement plan. Defenders of the current system, which covers virtually all state and local government workers, say it is well managed and no major changes are necessary.

Key findings in the Center for State and Local Government Excellence report include:

  • Pensions should be viewed as part of a broader human resources strategy that can affect recruitment and retention.
  • Policy makers need high quality data and analyses as they consider benefit changes.
  • Strong communication with all stakeholders helps employees, elected officials, and the public understand the need for change.
  • Discipline in funding a plan’s annual required contribution is important to achieve full funding.
  • Workplace financial education will help public employees learn how to build their retirement savings.

Nevada’s required contributions, paid half by the government agency employer and half by the employee, have been fully paid into the system for the past many years. The rates are set by an independent consulting actuary and are required to be followed by the state Legislature.

Dana Bilyeu, executive officer of Nevada PERS, said she is encouraged by the key findings in the report, two of which she has been advocating for some time: that pensions should be viewed as part of a broader human resources strategy that can affect recruitment and retention and that it is important to fully fund a plan’s annual required contributions.

“NVPERS continues to see commitment to long term financing on the part of the employers and employees to fund the plan over the funding time horizon,” she said.

The Center for State and Local Government Excellence is a non-partisan, non-profit organization engaging in research to shed light on issues such as competitive employment practices, workforce development, pensions, retiree health security and financial planning.

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Audio clips:

Elizabeth Kellar, president and CEO of the Center for State and Local Government Excellence says the 126 largest public pension plans have an $800 billion long-term unfunded liability:

091411Kellar1 :17 0.8 trillion dollars.”

Kellar says the report has important lessons for policy makers who are looking at significant reforms to their public pension plans:

091411Kellar2 :05 at significant reforms.”

Public Pension Reform Debate To Proceed, But Without Bill From Sandoval Administration

By Sean Whaley | 10:31 am March 29th, 2011

CARSON CITY – Despite citing the need to reform Nevada’s public employee pension plan, Gov. Brian Sandoval did not introduce a bill seeking changes to the retirement system by a deadline Monday.

Even so, Heidi Gansert, Sandoval’s chief of staff, said the administration will “be a part of the conversation” as other measures addressing potential reforms to the Public Employees’ Retirement System are considered in the 2011 legislative session.

“There are other bills that open up that chapter and so we want to be part of that conversation,” she said. “We just could not get agreement on the terms of the bill, and the process was so delayed at getting these bills out, that we ended up deciding we would look for another bill and be part of the discussion.”

Five measures relating to the retirement system for public employees have been introduced this session. One, Assembly Bill 405 by Speaker John Oceguera, D-Las Vegas, proposes to eliminate call-back pay as compensation for retirement purposes for employees hired after Jan. 1, 2012.

Gansert said Sandoval’s original proposal, the details of which were described at a briefing with the press last month, does not have to be the solution to the issue of the retirement system, which faces a $10 billion long-term unfunded liability.

“That proposal was something that we put together looking at what was done in other states,” she said. “But we know there are other ideas out there, so we are willing to talk to everybody about it recognizing that we do have a large unfunded liability and we want to work on that.”

Sandoval said during his campaign he wanted to change PERS for future government hires to make it a defined contribution plan, where employers and employees contribute to retirement but the employees are responsible for managing their funds. This is in contrast to the current “defined benefit” plan where contributions are managed by PERS and the employee is guaranteed a set pension on retirement based on salary and years worked.

In the briefing in February, the proposal being considered by Sandoval would have maintained the current defined benefit system but at about half the contribution rate in effect now, in effect halving the pension payments as well as the future liability to taxpayers. It would have been complemented with a 401(k)-style defined contribution plan that employees could contribute to for a bigger pension on retirement.

The defined benefit plans offered by states and government entities around the country have sparked concern over the potential future liability to taxpayers if there isn’t enough money to pay the benefits. Some plans are much healthier financially than others.

Supporters of Nevada’s current system, which covers virtually all state and local employees, say it is well managed and will be fully funded over time. They argue no changes are necessary.

A recent study by the Pew Center on the States identified Nevada’s public pension plan as one of 19 where “serious concerns” about the long-term health of the plan have been identified.

Nevada’s plan was 70.5 percent fully funded as of June 30, 2010.

Gansert said there are numerous interest groups, including the Las Vegas Chamber of Commerce, which will be involved in the PERS reform discussions as well.

Sandoval has said the public retirement system needs to more closely mirror what is offered by the private sector.

Audio clips:

Chief of Staff Heidi Gansert says the administration will pursue pension reform despite not having its own bill:

032911Gansert1 :16 of the discussion.”

Gansert says the administration will work with the Las Vegas chamber and others on reforms:

032911Gansert2 :14 work on that.”

 

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.”

Public Pension Reform Details Emerge From Sandoval Administration

By Sean Whaley | 4:32 pm February 28th, 2011

CARSON CITY – Gov. Brian Sandoval will propose a change to the retirement system for new state employees that would reduce their current pension benefits by one half and cut the long-term liability for taxpayers by the same amount, his chief of staff said today.

In a press briefing, Chief of Staff Heidi Gansert offered some details on the reform measure even though it has not yet been drafted for introduction to the 2011 Legislature.

The proposal would maintain the current “defined benefit” plan for new state workers, but at the lower amount. Contribution rates required by the state and new state employees would also be lowered to reflect the reduced benefit. As part of the change, the state would also provide a contribution to a “defined contribution” plan for workers to make up the difference in the lower defined benefit pension amount.

This new defined contribution portion of the plan would help the state financially because it would not create any long-term unfunded liability that taxpayers might end up having to pay. It is more like a 401(k)-type plan found in the private sector.

“So right now the exposure or the risk for the contributions for making the pension plans whole is on the taxpayer, basically,” Gansert said. “And we’re saying it should be shared, and the state exposure for these plans, will be capped at a certain rate.”

Creating a new plan for future hires could cost both the state and current state employees more in the former of higher contribution rates, however.

In a report prepared last year for the PERS board, the Segal Group Inc. said switching to a defined contribution plan for all new hires would require the defined benefit plan for current public employees to be funded more quickly, requiring much higher contribution rates over the next several years. For the state, it would require more funding it does not have.

A few lawmakers are expected to introduce their own reform proposals in the 2011 session.

Assembly Speaker John Oceguera, D-Las Vegas, has a PERS related bill draft request, but Charles Blumenthal, communications director for the Assembly Democratic caucus, said earlier this month it has not yet been decided what reforms, if any, will be pursued with the legislation.

Sandoval, who is in Washington, DC, visiting federal officials and others as part of a National Governors Association conference, has made changing the state retirement plan from a defined benefit plan – which creates a potential future tax liability – to a defined contribution plan – which has no such long-term financial risk to taxpayers – a priority of his administration.

A recent study by the Pew Center on the States identified Nevada’s public pension plan as one of 19 where “serious concerns” about the long-term health of the plan have been identified.

Sandoval has said the public retirement system needs to more closely mirror what is offered by the private sector.

The funding of public pensions is an issue nationally. Many plans are severely underfunded, putting taxpayers potential at risk. Nevada’s plan was 70.5 percent fully funded as of June 30, 2010.

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.

The plan outlined today by Gansert would take the fundamental shift sought by Sandoval only halfway, and only for state employees. Most state and local government employees are participants of the Public Employees’ Retirement System.

“What it does is it reduces the benefit, which would also reduce the potential liability for the state moving forward,” she said.

The change would not affect the $10 billion long-term liability faced by the retirement system right now for current public employees, but it would lessen the risk moving forward as new state employees are hired, Gansert said.

There were just over 102,000 active public employees participating in the retirement system in fiscal year 2010. Most public employees are eligible to retire with 75 percent of their pay, based on the three consecutive years of highest earnings, after 30 years of employment.

State employees, who currently pay half the contribution rate set by an independent actuary, make up only about 16 percent of the members. Clark County School District employees are the largest group at 31 percent.

Gansert said other public employers could potentially opt to join in with the proposal for new state employees. Sandoval’s proposal would also require all public employees to pay half the contribution rate. Some now don’t pay any.

The current retirement contribution rate is 21.5 percent for most public employees, but the rate is scheduled to jump to 23.75 percent on July 1 of this year. State workers pay half the rate, state agencies and taxpayers pay the other half.

Sandoval’s plan would cut the state required contribution rate to 6 percent for most employees, with another 6 percent coming from the workers for the defined benefit portion of the plan. State employees would then contribute separately to a defined contribution plan with a match of 2 percent by the state.

Police and fire fighters would get a 10 percent contribution rate and be required to pay another 10 percent.

“The current plan needs to be able to fund itself,” Gansert said. “And looking forward to new employees, they will have a lower benefit but they will also have a lower contribution rate.”

Audio clips:

Sandoval Chief of Staff Heidi Gansert says taxpayers now on the hook for public pension plan shortfalls:

022811Gansert1 :14 a certain rate.”

Gansert says Sandoval plan will lower the state liability moving forward:

022811Gansert2 :07 state moving forward.”

Gansert says new state employees will have a lower benefit but a lower contribution rate as well:

022811Gansert3 13 lower contribution rate.”

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

By Sean Whaley | 4:12 pm December 20th, 2010

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.”

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 Tax Expert Questions If Public Pension Plan Reform Can Move Forward In Short Term

By Sean Whaley | 12:36 pm December 10th, 2010

CARSON CITY – Long-time Nevada tax expert Carole Vilardo said says she does not see how the state can move Nevada’s public employee retirement system to a defined contribution plan in the upcoming legislative session.

The change, which would eliminate any future unfunded liability for new state and local government hires, is favored by Gov.-elect Brian Sandoval and some lawmakers.

Others argue changes made by the Legislature in 2009 need time to work, and that a radical change to the public retirement plan is unnecessary.

Vilardo, president of the Nevada Taxpayers Association, said in order to create a defined contribution plan for newly hired public employees, the existing defined benefit plan has to be fully funded at an accelerated rate. When she looked at the idea a few years ago, Vilardo said the time frame was seven years.

“The first thing that has to be determined is whether we can afford, at this point in time, to go to defined contribution,” she said during an interview on the Nevada NewsMakers television program that aired Thursday. “Given the current economy, if that has not changed, if those requirements have not changed of government, then I don’t see how we look at that for at least another four years or so.”

Vilardo said she does not believe the change can be made now because of the costs to the state and local governments associated with fully funding the current plan over the much shorter time span. The state’s current budget problems make such a transition unfeasible right now, she said.

“Sooner or later we’re going to have to go there,” Vilardo said of a switch to a defined contribution plan.

Nevada’s Public Employees Retirement System covers 103,000 active public employees, including state workers, teachers and local government employees.

The plan had a long-term unfunded liability at $10 billion as of the end of the 2010 fiscal year on June 30.

The plan was 70.5 percent fully funded as of June 30, 2010, down from 72.5 percent in the previous year. At its high point in 2000 the plan was 85 percent funded. Public employees and government agencies contribute to the plan based on rates recommended by an independent consulting actuary with a goal of having the plan fully funded over the next 30 years.

An increase in contribution rates is being submitted to the 2011 Legislature to ensure the long-term financial health of the retirement plan. The hit to the state general fund will be just under $9 million a year in the next two years. State employees will have to make a similar contribution.

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

Sandoval favors 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.

The PERS board next week will review information on the financial cost of making such a change so that the information is available to the 2011 Legislature.

A change to a defined contribution plan would eliminate the unfunded liability for future hires. There is a legal prohibition for changing the plan for workers currently in the system.

Audio clips:

Taxpayers Association President Carole Vilardo says Nevada may not be able to afford to change the public pension plan in the 2011 legislative session:

120910Vilardo1 :25 within seven years.”

Vilardo says the plan needs to be changed, but that it probably can’t happen for at least four years:

120910Vilardo2 :14 years or so.”

Public Employee Retirement Board Authorizes Study to Look at Impact of Reform

By Sean Whaley | 4:25 pm May 28th, 2010

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.

Audio files:

052810Goicoechea1 :16 is defined contribution.”

052810Leslie1 :10 the current system.”

052810Horsford1 :23 it’s an issue.”