In trying to come up with ways to tackle Nevada’s soaring pension debt, a key Nevada legislator put forth an idea that is the functional equivalent of trying to put out a fire by dousing it with gasoline.
At last week’s Interim Retirement and Benefits Committee legislative hearing, Assemblywoman and Committee Chair Maggie Carlton made it a point to declare that increasing wages for government workers was a viable way to reduce Nevada’s pension debt.
At the outset, it’s important to remember that the only reason PERS $13 billion unfunded liability matters is because of the massive burden it imposes on the government workers and taxpayers who must pay down this debt.
So suggesting higher wages as a way to reduce Nevada’s pension debt is a bit like recommending that a family struggling with credit card debt take out a lease on a brand new Mercedes — with no real strategy for how that will help other than belief in the phrase, “you’ve got to spend money to make money!”
But it’s actually even worse than that. Because higher wages translate to higher future pension benefits, Nevada governments and taxpayers would get billed twice: as the cost of higher wages is compounded by higher annual pension costs.
So what, if any, reduction in PERS unfunded liability would occur in exchange for increasing both the annual wage and retirement costs of Nevada governments?
Literally, zero dollars — and that’s in the best-case scenario. But more on that later.
Carlton’s genuinely too-good-to-be-true proposal came in response to a presentation by PERS executive officer Tina Leiss.
Leiss was discussing the result of payroll growth having been far below what the System assumed over the past 10 years.
And because PERS sets annual contributions as a percentage of payroll — rather than a level-dollar amount — the lower-than-assumed payroll growth means debt payments coming in below forecasts, which in turn requires levying higher contribution rates on public employees in order to ensure the full, expected dollar amounts are received.
After the conclusion of Leiss’ report, the following exchange occurred:
Chair Carlton: “So higher wages for state employees will deal with the unfunded liability?”
PERS Executive Officer Tina Leiss: “It would mean higher contributions then yes, as of total payroll growth. Yea.”
Carlton: “Okay. I think people forget that other side of the equation…all we hear about is the unfunded liability….no one wants to talk about the other side of the equation…if you do pay people more we can deal with that issue.”
Leiss’ less-than-coherent response — a stark contrast from the rest of her otherwise articulate testimony — appears the result of trying to give Carlton the “yes” answer she was clearly looking for, despite knowing the committee chair was way off base.
PERS has already adopted a schedule of expected dollar payments that must be paid in order to eliminate its existing unfunded liability.
Thus, changes to the payroll base do not affect the actual dollar amounts that must be paid. For example, if $11 must be paid next year, it is immaterial whether it is 10 percent of the $110 payroll assumed, or 11 percent of $100. While a higher payroll means a lower percentage cost, the actual cost remains unchanged.
Or, in the words of PERS own actuary: “It is important to note that changes in total member payroll do not affect the size of the [unfunded liability]; only the amount that is paid yearly as a percent of pay.” (Emphasis added.)
While higher wages cannot reduce the unfunded liability, they would increase the System’s accrued liability — which are future unfunded liabilities in the making, waiting to spring into existence whenever PERS investment assumptions prove overly optimistic.
To get a sense of the magnitude of the increased liability that would result from higher wages, we can look at the reduction in liability PERS attributed to a single year of lower-than-expected wage growth:
For the year ending June 30, 2017, lower-than-expected payroll growth reduced the system’s pension liability by $192 million. While a variety of factors affect PERS total liability, the effects of pay increases are clear: Higher wages increases the liability while lower wages reduces it.
What Leiss should have said in response to Carlton was something like this:
“No, higher wages would not, and cannot, reduce PERS unfunded liability. In fact, they would actually increase our accrued liability and thus risk increasing our unfunded liability over the long-term, while also immediately increasing the ongoing, annual costs of our participating members (government workers and taxpayers). The solution to payroll growth coming in below forecasts is to simply make our forecast assumptions better reflect reality.”
It is unclear as to why Leiss encouraged Carlton’s profound misunderstanding, rather than correcting it. However, the response was consistent with PERS history of misleading the courts, legislature and public at large.
For viable pension reform options, Nevada legislators would do well to consult recent reforms enacted in our neighboring states of Arizona and Utah, as well as the 2011 NPRI study Reforming Nevada’s Public Employees’ Pension Plan.