(Jim Clark) – Would you personally guarantee a financial obligation of someone you don’t know and never met? I didn’t think so and yet, that’s what every Nevada taxpayer does every day of the year. The culprit? Nevada’s Public Employee Retirement System (“PERS”). Why the contingent obligation? Follow me carefully on this.
PERS’ financial solvency depends on contributions from all Nevada “public employers”. PERS’ ratio of projected assets to projected liabilities (“net pension liability”) is barely 70%. Moreover the Government Accounting Standards Board has issued new stringent financial guidelines effective June 30, 2015 which will lower that asset/liability ratio to a level closer to 50% according to research by Boston College. Morningstar Financial has calculated Nevada PERS’ unfunded actuarial accrued liability at $4,265 per capita. In aggregate, the deficit (unfunded retirement promise) amounts to $12.5 billion dollars.
Still another threat is discussed in the Heartland Institute’s release on this subject. It says: “Another common accounting trick has been to project and rely upon a higher rate of return on investments of pension fund money than the funds could realistically achieve. (Hawaii) increased the (projected) rate from 4% to 7%.” Whoops. Nevada PERS is assuming an 8% return on investments. I wonder what’s going to happen when they get audited under the new more stringent standards.
In any case, if PERS’ solvency ratio continues to fall it will have to increase its demand for contributions from Nevada public employers. Who do they turn to raise revenue? Us taxpayers, that’s who. If it gets too bad can the counties, cities and other agencies declare municipal bankruptcy to reduce pension liabilities like Detroit, Vallejo, Stockton and San Bernardino did? Nope. In Nevada, municipalities cannot avail themselves of bankruptcy laws. What happens is the Nevada Department of Taxation takes over the insolvent municipality and raises taxes.
To ameliorate this threat, Incline/Crystal Bay’s Assemblyman Randy Kirner has introduced AB 190 in the Nevada Legislature. The measure would pare PERS’ future liabilities by offering public employees a “hybrid” retirement plan if hired after July 2016. Currently, PERS offers defined benefit plans in which the employee receives a retirement benefit based on a formula whether or not there are funds to pay for it. This is why the unfunded liability (unfunded promise) is crucial to the conversation. In a defined contribution plan, the employee is entitled to the total of contributions made by him/her, the total of contributions made by the employer plus investment earnings on the funds. The retiree can invest those funds in an annuity for retirement income or in any investment he/she deems fit.
Kirner’s “hybrid” retirement proposal consists of both a modest defined benefit plan modeled after Social Security plus a defined contribution plan. This would make PERS’ future obligations lower and much easier to calculate. It would also reduce public employers’ current expenses (24% of salary for regular employees and 40.5% of salary for police and firefighters). The proposed employee and employer contribution levels would be a total of 24% of salary for regular employees and 30% of salary for police and firefighters. This would be an immediate savings for cities, counties, etc. As an added bonus 25% of funds collected in the future would be applied to PERS’ net pension liability, eventually eliminating it.
Smart moves, right? Well some people don’t see it that way but their arguments are questionable. As the Las Vegas Review Journal explained: “Government employees, union leaders and PERS officials themselves have said that Nevada’s pension system is sound, yet so underfunded that it can’t be abandoned. Even though the state’s taxpayers can’t afford it, future government hires must be promised the same benefits as current employees and retirees, because the stable system is too unstable to do otherwise. Got it? If not you’re not alone.”
Ignore the spin, lawmakers! Pass this bill so the governor can sign it.
Jim Clark is President of Republican Advocates. He has served on the Washoe County and Nevada GOP Central Committees. He can be reached at firstname.lastname@example.org.