PERS contribution rates now up to 4 times higher than 52 years ago

Victor Joecks

In 1948, employees and employers in the Public Employees’ Retirement System of Nevada each contributed 5 percent of an employee’s salary to PERS to cover future retirement costs. Then, in 1963, that percentage rose to 5.75.

Receiving an employer match of 5 to 5.75 percent of one’s salary is not unusual for many private-sector employees.

Today for Nevada’s public sector, however, combined contribution rates have risen to 25.75 percent for regular government employees and 40.5 percent for police and fire.

Similarly extraordinary are the benefits that many Nevada public-sector retirees are cashing in.

In 2013, full-year equivalent pension payouts for 998 PERS retirees exceeded $100,000 each. Ten pensioners drew pensions paying over $200,000 annually.

Those payouts are determined, for government employees, by the highest three years of earnings — which include multiple categories of pay beyond the official base salary.

Examples are longevity pay, callback pay, multiple forms of premium pay, end-of-career promotions or just spending one’s last few years as a firefighter in Laughlin.

These are the ploys that allow government workers to inflate their pensions into the stratosphere.

Private-sector workers, of course, face a different reality: Their returns reflect amounts invested and subsequent investment earnings. In contrast to government workers, extra investments made at the end of a private-sector worker’s career, when his income is at its highest, have less time to accumulate interest.

Another difference is when those benefits can be collected.

In Nevada’s state and local governments, police and fire employees can “retire” as young as 38 after working just 20 years, then purchasing five years of retirement credits called “air time.” Even non-public-safety employees can “retire” as young as 43 after working just 25 years and buying five years of “air time.”

A private-sector worker, however, faces tax penalties if she withdraws from a 401(k) plan before reaching age 59½. And Social Security’s full retirement age for workers is 66.

Such lavish public-sector retirement benefits — paying out many more years than private-sector benefits — are expensive.

To meet these obligations, PERS for decades has hypothesized investment returns of 8 percent or more. However, the investment returns needed by PERS haven’t shown up. From 2002 to 2013, PERS’ actuarial investment returns only topped 8 percent once.

The long downward slope of PERS’ investment returns is clear. From Fiscal Year 1985 to 1994, they averaged 13.2 percent. From FY 1995 to 2003, they averaged 9.6 percent. And from FY 2004 to 2013, PERS’ investment returns averaged just 5.7 percent.

As a result, over the years, PERS has required dramatic increases in the required contribution rates of participating governments. Around 1981, Nevada’s Legislature began requiring most local government agencies to withhold and pay their employees’ half of pension contributions,

In 1981, those contributions were 15 percent for regular employees and 17 percent for police/fire employees — a 50 to 70 percent increase over the previous 10 percent combined contribution requirement.

By 1991, contribution rates had doubled from original levels: to 19 percent for regular employees and 24 percent for police/fire.

In 2001 and still riding the dot-com bubble, contribution rates for regular employees had fallen slightly to 18.75 percent, while police/fire had nearly tripled to 28.5 percent. Even a bubble market couldn’t keep up with the cost of exorbitant police/fire retirement benefits.

In the last few years, many private-sector workers lost the 401(k) match offered by their employers as companies struggled to survive the recession. Required pension contributions for government workers continued to surge, though.

In 2015, those contribution rates are 25.75 percent for regular employees and 40.5 percent for police/fire.

So required pension contribution rates in the Silver State are two-and-a-half times to quadruple where they were when PERS began. This — plus collective bargaining laws that give union officials more effective power than local government officials — is the reality behind the budget struggles of Nevada’s cities and counties.

Although government workers at the state level do not collectively bargain, higher pension contribution rates still squeeze the state’s budget, helping force higher burdens on taxpayers in each of the last three legislative sessions.

For the Nevada taxpayers left footing the bill, there’s something even more disheartening: PERS still has an unfunded liability of around $40 billion — despite the contribution rates now being 2.5 to 4 times higher than in 1962.

These numbers mean that fundamental PERS reform is a mathematical imperative.

The needed solution — which both Democrat-leaning Rhode Island and Republican-leaning Utah have adopted — would be a hybrid system that protects workers in the current defined-benefit system and limits taxpayer liability, while transitioning to a defined-contribution system for new employees.

It would improve the flexibility, portability and sustainability of Nevada’s government pensions.

Best of all, being bipartisan, it is eminently doable.

This commentary was originally published in the Las Vegas Review-Journal.

Victor Joecks is Executive Vice President at the Nevada Policy Research Institute, a non-partisan, free market think tank.