Pension Reform Must Come Before Tax Hike

Before lobbying the legislature to raise Nevadans’ taxes yet again — its property taxes this time — incoming Clark County chief executive officer Yolanda King should heed the advice of one of her predecessors: Dr. Thom Reilly.

As the former head of Clark County, Reilly has firsthand experience with trying to manage the county’s largest expense: employee compensation. Reilly, now a professor at Arizona State University, has authored several works urging public officials to “re-think public employee compensation,” with specific focus on public pensions, like the Public Employees’ Retirement System of Nevada (PERS).

Reilly found that most Nevada government workers receive richer compensation packages than their private-sector counterparts, largely due to stealthily enhanced PERS benefit packages that were “politically easier” to pass than a pay increase.

Unsurprisingly, reforms have long been opposed by entrenched interests — as government unions had little interest in giving up the lucrative pay packages they acquired through years of political maneuvering.

But, that has changed dramatically in recent years. The added cost to pay down PERS debt means the vast majority of today’s government workforce no longer benefits from the status quo.

Only a tiny fraction of the money needed to pay members’ future benefits is collected through annual contributions, with the rest dependent on PERS achieving an average 8% annual return on their investments in stocks and bonds.

But because that hasn’t happened over the past 5, 10, 15, 20 and 25 years, current taxpayers and PERS members have had to make up the difference — the main reason why PERS contributions have increased by more than 50% in real, inflation-adjusted dollars over the past two decades.

Now, nearly half of the 14% salary deduction that members must pay PERS is spent on debt, not their own future pension.

Consequently, all new members are expected to be net losers under PERS, as even the most skilled investor couldn’t overcome losing 40% of every dollar invested before making a single trade, which is essentially what is happening to the retirement contributions of all Nevada government workers.

In total, approximately $600 million of the $1.5 billion that members and taxpayers sent to PERS last year went to paying down the system’s multibillion dollar debt — which provides no benefit whatsoever to the current worker, taxpayer or employer paying this “pension tax.”

This is why pension reform enjoys widespread support across the ideological spectrum, with scholars at the right-leaning American Enterprise Institute and the left-leaning Brookings Institution having argued that the status quo is both unfair and unsustainable.

Recently, experts at the Stanford Institute for Economic Policy Research ranked Nevada’s public pension debt as the 10th largest nationwide, which they calculated at nearly $57,000 per household.

But that number is set to explode if the investment forecast made by PERS hand-picked consultant, Wilshire Associates, proves accurate. Based on the average 5.85% annual return Wilshire predicts for PERS, both the debt itself and the cost to service could easily double over the next ten years.

At that point, it’s likely that there would simply not be enough taxes to hike and services to cut to make PERS solvent—leaving no other choice but to cut the benefits promised to retirees.

In order to avoid that fate, and save PERS, Nevada lawmakers must act with the urgency that this situation demands.

An official with Oregon’s public pension plan — which is in slightly better shape than PERS — put it best: “This is becoming a moral issue. We can’t just talk about numbers anymore.”

One possible solution, which mirrors the successful reforms recently passed in Utah and Arizona, is Controller Ron Knecht’s proposal.

Simply by ensuring all expenses benefit the employee paying them, this new PERS tier would provide workers with a world-class retirement benefit while trimming costs by nearly 35%.

Sensible reform of this type must come before another tax hike.

Robert Fellner is the director of transparency research at the Nevada Policy Research Institute. This commentary was originally published on Forbes.com.