by Sean Whaley, Nevada News Bureau: 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.
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:
Hill says the employee benefits issues should be addressed so the solutions are sustainable over the long term:
Hills says legislative leadership is working on solutions: