Former Clark County manager outlines need for PERS reform
Thom Reilly, former Clark County manager, had a great op-ed in the Review-Journal yesterday, which details exactly why pension reform is so urgently needed.
Nevada's pension system is one of the most generous public employee retirement plans in the nation.
Nevada PERS caps benefits at 75 percent of the average of retiring employees' three consecutive highest-earning years – 90 percent for those hired before July, 1, 1985. The system has no minimum retirement age, as long as the retiree has 30 years of service, and has few employees who are required to actually contribute to their own retirement. PERS has one of the highest formula multipliers used to calculate benefits – either 2.5 percent or 2.67 percent per year of service, depending on employment dates, while the national average is 1.95 percent – while Nevada governments provide some of the highest average salaries in the nation.
Also, Nevada PERS has one of the highest employer contribution rates in the nation. While higher contribution rates are typical of plans that do not include Social Security coverage in addition to a pension – like Nevada's – the state ranks as one of the highest among plans that do not include Social Security coverage for both regular employees and for police and fire. At the same time, Nevada ranks in the bottom fifth of states with regard to the percent of funded pension liabilities. It is generally assumed that pensions funded at 80 percent or less have a serious problem. Nevada's is 71 percent funded.
The only disagreement I'd have with Reilly here is that PERS is actually only 34 percent funded, not 71 percent. To get to 71 percent, PERS officials currently assume a risk-free 8 percent rate of return.
So what should we do about this growing problem?
Reilly's piece has several good suggestions, but the ultimate solution is moving public employees to a defined-contribution orhybrid (combining elements of a defined-contribution and defined-benefit) retirement system. From NPRI's PERS study:
Shifting PERS to a defined-contribution, 401(k)-type structure would not make these unfunded liabilities go away. However, it would ensure that benefit obligations are fully funded going forward, ensuring that lawmakers, taxpayers and public employees are clear regarding the pensions promises the government has made and its ability to fulfill them.
While a defined-contribution (DC) approach is not perfect, experience with reformed 401(k) plans and the Thrift Savings Plan for federal government employees shows that a DC pension plan can be managed cost-effectively for employees and taxpayers alike.
Ignoring Nevada's unfunded pension liability will only make the problem worse. And, as we've seen in California, ignoring these problems can lead to bankruptcy.