Compensation levels for public employees in Nevada have been a topic of hot debate in recent months. As unemployment tops 12 percent in the Silver State, private citizens have grown weary of being forced to pay higher taxes in order to fund what have increasingly been viewed as relatively lavish salaries for union-protected government employees. Yet, while salary information for public employees has been well documented in the popular media and is available at TransparentNevada.com, one aspect of employee compensation — benefits, including retirement — has frequently been overlooked.
With an annual 2008 payroll for retirement benefits of about $5.2 billion, the Nevada Public Employee Retirement System is significantly larger than the operating budget for state government. To fund this outlay, taxpayers are forced to pay into the NV PERS investment fund. NV PERS financial statements show that, in 2008, taxpayers paid $963 million into the fund. In addition, public employees contributed $101 million, or about 9.5 percent, toward their own retirement fund. That money is invested in a variety of assets that hopefully allow NV PERS administrators to earn a return from which they can make payments to retirees.
If, for some reason, the returns on investment become insufficient to make those payments, then taxpayers would be forced to pay again to make up the difference. This is why the system's unfunded liability — the amount of money it doesn't have but is legally obligated to pay — should be a big concern to taxpayers. At the end of FY08, that amount stood at $7.26 billion. In the time since, investment markets have been extremely volatile and the NV PERS portfolio at times has experienced negative returns. In fact, in December 2008, NV PERS officials testified that the fund had lost more than $4 billion in valuation since the end of FY08 — bringing the unfunded liability up to $11.5 billion. That would mean that every man, woman and child in the Silver State owes about $4,400 as his or her share of public employees' pensions.
The debt burden imposed by NV PERS will continue to grow for the foreseeable future. Between FY99 and FY08, the number of individuals receiving payments from NV PERS grew 81 percent, from 21,022 to 38,130. At the same time, the size of the benefits paid has also grown substantially. In FY99, the average retired service employee received $18,480 from NV PERS, while the average firefighter or police officer received $27,996. For FY08, those numbers stood at $27,672 and $44,880, respectively.
The notable increase in the size of payments to police and firefighters most likely reflects the growth of a practice known as "spiking." Retirement payments are calculated based on an employee's pay over a span of the employee's 36 highest-earning months. Included in those earning calculations are base salary, paid vacation, paid sick leave, longevity pay, premium pays for specialized certifications such as a paramedic's license and callback pay. Callback pay is similar to overtime in that it pays at an overtime rate, but it means that an employee was called back into work within 24 hours of his last shift. Savvy police and firefighters have learned that they can dramatically increase their retirement payments by increasing the amount of callback hours worked over their last three years of employment.
Recognizing this trend, Senate Republicans insisted on addressing the issue of spiking at the end of the 2009 Legislative Session. In exchange for acceding to the largest tax increases in state history, they received the moderate PERS reforms in Senate Bill 427 that capped PERS-eligible annual pay increases over an employee's last five years of retirement. Under the new law, public employees will remain free to work additional callback hours, but the pay level that can be used to determine PERS benefits cannot increase by more than 10 percent annually. Because of contractual obligations, the new law will only apply to new employees hired after Jan. 1, 2010.
While this reform is a small step in the right direction, it falls short of true pension reform, because it does not curtail the unfunded PERS liability for which taxpayers are responsible. Even the federal government, 22 years ago, altered its pension system for public employees and moved to a "defined contribution" system resembling the market-based retirement plans found in the private sector. Given the mounting burden that the NV PERS defined benefits plan places on taxpayers, it is now long overdue for Nevada to follow the lead of Congress.
Powerful union interests have long opposed meaningful pension reform, but state policymakers have a responsibility to protect the private citizens who are on the hook for these escalating retirement obligations.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. This article originally appeared in the September 2009 edition of the Nevada Business Journal.