(Sean Whaley/Nevada News Bureau) – Nevada’s public employee retirement system will require increased contributions from the state and local governments next year to maintain the long-term financial health of the defined benefit plan, the board overseeing the program was told yesterday.
The contribution rate for regular employees will have to increase by 2.25 percentage points to 23.75 percent in the coming two years. The retirement system covers 103,000 active public employees, including state workers, teachers and local government employees.
Police and fire fighters will also see an increased contribution rate of 2.75 percentage points to 39.75 percent. This group of workers is evaluated separately.
The increases, recommended by an independent consulting actuary, were adopted by the Public Employees Retirement System Board and forwarded to the state budget director and Legislature.
The 2011 Legislature will be asked to fund the increased retirement costs. Lawmakers in past sessions have fully funded the contribution rates recommended by the actuary and the retirement board.
The increases will be shared by employees and employers. Regular state employees who pay half of the total contribution will see 11.875 percent of their salary go to their retirement starting July 1, 2011, up from the 10.75 percent now.
The increase will mean a slight salary reduction for state workers at a time when cost-of-living increases have been eliminated and unpaid furloughs implemented because of the state’s dire budget situation. These cost-cutting measures are expected to continue in the next two-year budget.
The amounts paid by school district and government employers and their employees depend on the results of collective bargaining negotiations. A 50-50 employee-employer match is required, but local governments have in the past paid a bigger share of the contributions in lieu of salary increases. State employees do not have the right to collective bargaining.
Dana Bilyeu, executive officer of PERS, said the actual cost of the increase to the state and state employees will be $8.7 million each in fiscal year 2012 and 2013 based on estimates by her agency. This compares to an annual $9.3 billion state budget in 2010 when all funds are included, she said.
For the entire system statewide, the cost of funding the program equates to 2.4 percent for public employers and another 2.4 percent for public employees based on total public government budgets of $27 billion, Bilyeu said.
Claims that public employee pension costs are going to sink government budgets are exaggerated, she said.
The PERS board was also told, however, that the long-term unfunded liability of the state public pension plan grew in the fiscal year that ended June 30, to $10 billion from $9.1 billion as of June 30, 2009.
The plan was 70.5 percent fully funded on June 30, 2010, down from 72.5 percent in the previous year. At its high point in 2000 the plan was 85 percent funded.
These long-term unfunded liabilities of the PERS plan and for public employee pension plans nationwide are generating concern from policy makers.
Nevada Gov.-elect Brian Sandoval said today he remains convinced the PERS system needs to change from a “defined benefit” plan where retirement payments are guaranteed based on salary and years worked, to a “defined contribution plan” where public employers contribute to employee retirement without any guarantees of pension amounts upon retirement.
Such a change would eliminate the unfunded liability for future hires. There is a current legal prohibition for changing the plan for workers currently in the system.
A report on a shift to a defined contribution plan for future hires will be presented to the PERS board in December.
Bilyeu is not advocating such a change to the board or to the Legislature but recommended the analysis to provide the information to lawmakers and the governor.
Not all elected officials are convinced Nevada’s public pension plan needs such a change.
Lawmakers in 2009 did make some changes to the PERS system to control costs, including raising the retirement age for new employees to 62 from 60.
But there is a growing chorus of critics who say more drastic changes are needed to reign in pension costs or government entities will soon face bills they cannot pay.
A study of state and local government pension funds by the Pew Center on the States released in February identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan.
Geoffrey Lawrence, a fiscal policy analyst with the Nevada Policy Research Institute, said in an article this week that PERS officials are understating the implications of the unfunded liability.
“In the event that PERS’ assets become insufficient to make the promised benefits payments to retirees, the shortfall would almost certainly be filled using tax dollars,” he said.
Lawrence noted that between fiscal year 2000 and fiscal year 2009, PERS’ unfunded liability nearly quadrupled, growing from $2.3 billion to $9.1 billion.
“Moreover, as NPRI has noted, even this amount is dramatically understated because PERS accounting methods fail to consider the price of risk or instability in the marketplace,” he said. “PERS administrators assume that, like clockwork, they will be able to realize an 8 percent annual return with zero risk in the portfolio.”
Bilyeu said the PERS investments do assume an annual rate of return over time of 8 percent. The plan has averaged a 9.3 percent rate of return over the past 25 years, she said. The 8 percent rate of return on investments assumption will be evaluated in 2012.
Bilyeu acknowledged the concerns over the solvency of public employee retirement plans nationwide, but said Nevada’s plan has been regularly funded based on the independent actuarial valuation performed every two years.
Pension funding concerns are legitimate for those plans that are not fully funded every year based on actuarial analyses, such as those in Illinois, New Jersey and some other states, she said.