(Sean Whaley/Nevada News Bureau) – Gov. Brian Sandoval will propose a change to the retirement system for new state employees that would reduce their current pension benefits by one half and cut the long-term liability for taxpayers by the same amount, his chief of staff said today.
In a press briefing, Chief of Staff Heidi Gansert offered some details on the reform measure even though it has not yet been drafted for introduction to the 2011 Legislature.
The proposal would maintain the current “defined benefit” plan for new state workers, but at the lower amount. Contribution rates required by the state and new state employees would also be lowered to reflect the reduced benefit. As part of the change, the state would also provide a contribution to a “defined contribution” plan for workers to make up the difference in the lower defined benefit pension amount.
This new defined contribution portion of the plan would help the state financially because it would not create any long-term unfunded liability that taxpayers might end up having to pay. It is more like a 401(k)-type plan found in the private sector.
“So right now the exposure or the risk for the contributions for making the pension plans whole is on the taxpayer, basically,” Gansert said. “And we’re saying it should be shared, and the state exposure for these plans, will be capped at a certain rate.”
Creating a new plan for future hires could cost both the state and current state employees more in the former of higher contribution rates, however.
In a report prepared last year for the PERS board, the Segal Group Inc. said switching to a defined contribution plan for all new hires would require the defined benefit plan for current public employees to be funded more quickly, requiring much higher contribution rates over the next several years. For the state, it would require more funding it does not have.
A few lawmakers are expected to introduce their own reform proposals in the 2011 session.
Assembly Speaker John Oceguera, D-Las Vegas, has a PERS related bill draft request, but Charles Blumenthal, communications director for the Assembly Democratic caucus, said earlier this month it has not yet been decided what reforms, if any, will be pursued with the legislation.
Sandoval, who is in Washington, DC, visiting federal officials and others as part of a National Governors Association conference, has made changing the state retirement plan from a defined benefit plan – which creates a potential future tax liability – to a defined contribution plan – which has no such long-term financial risk to taxpayers – a priority of his administration.
A recent study by the Pew Center on the States identified Nevada’s public pension plan as one of 19 where “serious concerns” about the long-term health of the plan have been identified.
Sandoval has said the public retirement system needs to more closely mirror what is offered by the private sector.
The funding of public pensions is an issue nationally. Many plans are severely underfunded, putting taxpayers potential at risk. Nevada’s plan was 70.5 percent fully funded as of June 30, 2010.
Advocates for the current system say Nevada’s public employee retirement plan is well managed, is being funded appropriately and will be fully funded over time. They say no major changes are necessary.
The plan outlined today by Gansert would take the fundamental shift sought by Sandoval only halfway, and only for state employees. Most state and local government employees are participants of the Public Employees’ Retirement System.
“What it does is it reduces the benefit, which would also reduce the potential liability for the state moving forward,” she said.
The change would not affect the $10 billion long-term liability faced by the retirement system right now for current public employees, but it would lessen the risk moving forward as new state employees are hired, Gansert said.
There were just over 102,000 active public employees participating in the retirement system in fiscal year 2010. Most public employees are eligible to retire with 75 percent of their pay, based on the three consecutive years of highest earnings, after 30 years of employment.
State employees, who currently pay half the contribution rate set by an independent actuary, make up only about 16 percent of the members. Clark County School District employees are the largest group at 31 percent.
Gansert said other public employers could potentially opt to join in with the proposal for new state employees. Sandoval’s proposal would also require all public employees to pay half the contribution rate. Some now don’t pay any.
The current retirement contribution rate is 21.5 percent for most public employees, but the rate is scheduled to jump to 23.75 percent on July 1 of this year. State workers pay half the rate, state agencies and taxpayers pay the other half.
Sandoval’s plan would cut the state required contribution rate to 6 percent for most employees, with another 6 percent coming from the workers for the defined benefit portion of the plan. State employees would then contribute separately to a defined contribution plan with a match of 2 percent by the state.
Police and fire fighters would get a 10 percent contribution rate and be required to pay another 10 percent.
“The current plan needs to be able to fund itself,” Gansert said. “And looking forward to new employees, they will have a lower benefit but they will also have a lower contribution rate.”