Dubious Reassurances

By Doug French
  • Monday, December 13, 2004

The Nevada Public Employees’ Retirement System (NVPERS) is attempting to answer -- through a statement on its website -- increasing doubts about the financial viability of its system.

“PERS’ FUNDING Efficient, Stable, Financially Sound,” says a link on the site front page. It goes to a letter intended to reassure NVPERS members about their system’s unfunded liabilities. 

However, the letter presents no evidence that would put informed taxpayers’ minds at ease.

NVPERS management pats itself on the back for having reduced the pension plan’s unfunded liabilities over the last 20 years. In 1984, the plans were only 53 percent funded. “Through careful management and commitment by your Retirement Board,” the letter crows, “the System was over 81% funded as of June 30, 2003 (most recent publication date).”

The letter goes on: “From 1984 through 2003, the annualized return of our investment program was 10.9%.” A nearly 11 percent return over two decades is extraordinary—but maintaining such performance will be impossible, especially given the ever-more numerous assets under system management.

In 1984, US Government 10-year bonds were sold yielding over 13 percent. Now, however, those bonds yield just over 4 percent. And of course the 1990s saw the greatest stock bull market in U.S. history: Despite the market crash in 1987 and swoon in 2000, the increase from 1984 to June 2003 of the S&P was just shy of five-fold.

Many investment experts believe that stock market returns going forward will be muted. Ed Keon, quantitative market strategist with Prudential Equity Group, recently told Barron’s: “I suspect that over the next several years, we’ll get positive returns from stocks, on average, but they’ll be well below the historic average. Instead of getting 10% or 11%, the mid-single-digits is a more reasonable expectation.”

Other stock market analysts are not even that positive. Robert Arnott, editor of Financial Analysts Journal, and Peter Bernstein author of Against the Gods, believe that the stock market, even “on the hopeful side,” faces a 50 percent drop in coming years.

Orange County California Treasurer John M.W. Moorlach—who predicted the 1994 Orange County bankruptcy—doesn’t believe the financial assumptions made by public employee retirement systems are sustainable. The Orange County PERS system assumes a 7.5 percent annual return. “That’s quite an assumption,” writes Steven Greenhut in the Orange County Register. “Moorlach compares it to banking that the Angels will be in the playoffs every year for the next 30 years.”

Nevada PERS assumes it will earn 8 percent annually from a portfolio that, as of June 2003, had 43.6 percent of its assets in stocks, 48.3 percent in U.S. Bonds and 7.2 percent in real estate.

The PERS letter says the system “enjoys the benefit of positive cash flow with monthly contributions and investment income exceeding benefit payments.” No doubt that is true: PERS has 90,242 active members and only pays benefits to 28,768 retirees.

But as in the case of Social Security, as more government employees retire, the existing government workforce and taxpayers funding the system will be forced to make greater contributions.

NVPERS management says the system’s unfunded liabilities are to be expected and “are generally amortized over a 20 to 40 year period, in a manner similar to paying off a home mortgage.”

But, asks Steven Greenhut, “Would you incur debt based on the prediction that your house will continue to appreciate for the next 30 years at the same rate it has appreciated over the past five years?”

“I didn’t think so,” he concludes.

NVPERS management writes: “The central goal for all of us at PERS is to protect the financial integrity of the System.” However, as Thomas G. Donlan writes in Barrons, the underfunding in many federal, state and local government pension plans is even worse than that of the private defined-benefit pension plans that threaten to bankrupt large steel and airline companies. “‘Out of sight, out of mind,’ applies even more” to the government pension systems, says Donlan, because “they have no funding requirements and no insurance coverage except their sponsors’ power to raise taxes.”

“Companies [and governments] never had to support their pensions the way that insurance companies finance annuities,” he explains. “They have been free to make promises faster than they could fund them.”

Unless PERS is transformed from a defined-benefit plan into a cash-balance or defined-contribution plan—as the IBM pension plan was a few years ago—Nevada taxpayers will be delaying retirement into their 70s and 80s … to allow  government employees to retire at 50.

Doug French is executive vice president at a Southern Nevada bank and a policy fellow of Nevada Policy Research Institute.

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