Government Transparency

Why PERS reform is imperative in 2 charts

Victor Joecks

The Public Employees’ Retirement System of Nevada has a huge math problem: It’s promised to pay around $40 billion more in benefits than it currently has, even after including reasonable returns from its investment.

While few individuals have as much in their retirement account as they would like, PERS’ math problem affects all Nevadans, because taxpayers guarantee these benefits. One significant cause of this problem is that PERS assumes it will average 8 percent a year in investment returns.

Since the 1980s, though, investment returns have been trending downward. The chart below shows PERS’ actuarial value investment return, which is an average of its investment returns for the last five years. PERS uses this to “smooth” out investment returns, and these returns show cyclic investments returns that are trending down.

Investment returns from FY 1985 to 1994 averaged 13.2 percent. From FY 1995 to 2003, investment returns were 9.6 percent. From FY 2004 to 2013, PERS’ actuarial investment returns averaged just 5.7 percent and only topped 8 percent once.

As returns have fallen below projections, the status quo forces taxpayers to increase their contribution rates. Faced with increasing contribution rates, politicians have either raised taxes, allowed increased PERS contributions to crowd out other spending priorities or both.

The required contribution rate for police and fire employees has grown from 28.5 percent of salary in FY 2004 to 40.5 percent in FY 2015. Contributions for regular employees have gone from 20.25 percent to 25.75 percent.

That’s right: Taxpayers contribute an additional 40.5 percent of a police or fire employee’s salary to pay for their retirement. What private sector employee receives a 40.5 percent or even a 25.75 percent pension contribution?

While a government employee is supposed to pay half of this amount, government workers have rarely seen their pay decrease as these contribution rates have increased. Instead, the government employer usually pays the employee’s share of the increased contribution in lieu of a pay increase.

In just 12 years, contribution rates have increased by 42 percent for police and fire and 27 percent for other government employees. And that’s only one factor in the absolute increase in pension spending. Total contributions have also increased as employee salaries and the number of government employees have grown.

Just over a year ago, AonHewitt produced a $50,000 report purporting to show that the financial health of PERS is improving and that the unfunded liability will disappear in 30 years. While some union officials claimed the report showed that Nevada doesn’t need to enact pension reform, a look behind the assumptions of the report shows significant problems.

First, AonHewitt assumed that contribution rates would increase, again, to 44 percent for police/fire and to 28.7 percent for regular employees. Second, it assumed that PERS would average 8 percent in investment returns for 30 consecutive years.

As the numbers above show, that isn’t mathematically realistic.

So, what steps should lawmakers take to fix this math problem?

The ultimate solution, which both Republican-leaning Utah and Democrat-leaning Rhode Island have adopted, is to implement 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. Additional information is available in Utah state Sen. Dan Liljenquist’s study, Keeping the Promise: State Solutions for Government Pension Reform.

Other reforms lawmakers should consider include:

  • Require PERS to follow generally accepted accounting standards for private companies
  • Calculate pensions only on base pay, instead of including things like call back or longevity pay.
  • Base pensions on the average of an employee’s highest 10 year of earnings. For comparison, Social Security bases payouts on a worker’s highest 35 years of pay
  • Change the structure of PERS Board by not allowing a PERS participant, either a current member or retiree, to sit on the board

Pension reform is a mathematical necessity. Fortunately, lawmakers have a variety of options to improve the flexibility, portability and sustainability of Nevada’s government pensions.

Victor Joecks is executive vice president of the Nevada Policy Research Institute, a non-partisan, free-market think tank. For more visit http://npri.org.