By Geoffrey Lawrence, Nevada Policy Research Institute
As lawmakers emerge from the 26th special session and head toward a highly contentious 2011 regular session, it is clear that Nevada’s budget crunch is the direct result of two primary factors.
First, budget making suffers from a structural problem that leads naturally to unsustainable growth in spending. The backwards budgeting process used by the Department of Administration sets arbitrary spending targets for lawmakers that often include built-in, across-the-board, annual pay raises of 8.5 percent or more for all state employees.
While annual pay raises of this magnitude may be appropriate for highly effective individual workers, awarding such raises universally and automatically produces unsustainable growth in labor costs. Indeed, the unrealistic pay structure politicians created for Nevada public employees, over time, has contributed to a scenario where public employees not only enjoy greater security than their private-sector counterparts, but they are also paid 28.1 percent more, on average, than private-sector workers in similar job classifications.
Second, Nevada politicians, refusing to save surplus revenues resulting from the 2003 tax hikes, went on a prolonged spending binge beginning in the 2005 legislative session. Then-Governor Kenny Guinn and lawmakers committed taxpayers to new long-term spending programs that inevitably had to run out of money. Inflation-adjusted, per-person costs of government jumped $273 after the 2005 legislative session and have remained elevated ever since. If 2003-05 levels of per capita spending had been in place this biennium, no shortfall would have occurred.
Hence, the obvious solution to the recent budget shortfall should have been eliminating the new spending since 2005 that led Nevada headlong into fiscal crisis. Alternatively, if lawmakers deem new spending programs of higher priority than the old, then reductions in the old spending should offset the new spending costs.
Lawmakers’ continued negligence on these two fronts promises future fiscal catastrophe for the state. Indeed, the failure to effect the long-overdue reforms needed by Nevada’s Public Employees’ Retirement System is attracting national attention.
According to a new report from the Pew Center on the States, “Nevada’s management of its long-term pension liability is cause for serious concern and the state needs to improve how it handles its retiree health care and other benefit obligations.” The report shows a $7.3 billion unfunded liability for PERS as well as a completely unfunded $2.2 billion liability for retiree health benefits.
However, even these numbers causing “serious concern” are understated, as the Pew Center’s period of analysis ended June 30, 2008. As of June 30, 2009, PERS’ unfunded liability had risen to $9.1 billion.
PERS is a ticking time bomb. Its current $9.1 billion unfunded liability is 298 percent larger than it was in 2000 and continues to grow. The number of recipients receiving benefits grew 10 percent in fiscal year 2009, up 85 percent from 2000. Additionally, the average pension allowance for beneficiaries has grown by 53 percent since 2000. In short, the total cost of retiree benefits has increased 186 percent—nearly tripled— in nine years. And as the system’s 105,417 participating active employees approach the average PERS retirement age of 59, these escalating costs will only worsen.
Although Nevada taxpayers contributed a record $1.33 billion toward government employees’ pensions in 2009 (the employees themselves contributed only $122 million), PERS’ contractual commitments continue to outstrip what taxpayers are able to contribute. As Indiana state Senator Jim Buck told the American Legislative Exchange Council recently, “If legislators do not properly address the crisis in public pensions, it will make current budget problems in the states look trivial.” He’s right.
According to a recent ALEC report:
The solution to the funding crises in state pension plans will require fundamental reform. Everything should be on the table, including changes in benefits and increased employee contribution rates, as well as employer contribution rates. These plans should consider replacing their defined benefit plans with defined-contribution plans for new employees.
Although the 2009 legislature tinkered around the edges of PERS, those changes in no way represented “fundamental reform.” The key recommendation from ALEC—replacing the current “defined benefit” plan with a “defined contribution” plan to eliminate the unfunded-liabilities danger—has not been pursued in Nevada. More than two decades ago, the federal government recognized that the escalating liabilities of its defined benefits plan for federal workers were unsustainable and moved to a defined contribution plan. It is long past time for Nevada to do the same.
Moreover, to weather the current economic storm, Nevada lawmakers should consider following the lead of the private-sector firms that have temporarily suspended the match rates on their defined-contribution-style 401k programs. Statutory match rates for PERS are set at 10.5 percent of a regular employee’s income or 17.25 percent for police and firefighters. Most employees, however, participate in a separate program where taxpayers fully fund their pension plan at rates of 20.5 and 33.5 percent, respectively. In exchange, the employees accept smaller annual pay raises.
Were the statutory match rates for public employees suspended for 2009, state and local taxpayers could have saved an estimated $602 million. That would have made a sizable dent in the $887 million shortfall that lawmakers recently addressed in the special session. A question exists whether such a move would be contractually feasible. However, it is certainly an option that should have been explored. At the very least, the idea should be instituted for new hires.
If lawmakers fail to get control of PERS now, PERS will soon control them—and all the rest of us.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.