The Nevada pension system’s debt is growing each year because it continues to miss its projected investment targets. Writing in the Las Vegas Review-Journal, Robert Fellner, director of transparency research at the Nevada Policy Research Institute (NPRI), says the Public Employee Retirement System of Nevada (PERS) had only a 2.3 percent return on its investments, which means PERS has now “missed its target over the past five, 10, 15, 20 and 25 years.” As a result, Fellner is concerned tax hikes may be on the way.
If the rate of return continues to fall short of expectations, the state’s pension system may be in even more trouble than is currently thought. The current rate has increased over the years; it was as low as three percent in 2000, and the rate PERS now uses is eight percent. Pension experts recommend states use an expected investment return rate of 3.1 percent, based on 30-year Treasury bond yields. Taxpayers cannot afford for states to continue overpromising and underfunding their pension plans.
The fiscal health of Nevada’s pension system may be far worse than most people recognize. According to NPRI, if Nevada PERS were to use fair-market valuation, which is required for private sector plans, PERS’ funding ratio would fall from 70 percent to approximately 34 percent, with the pension plan’s reported unfunded liability increasing from roughly $10 billion to almost $41 billion.
State Budget Solutions found in a 2013 study that of all the nation’s government-worker pension plans, Nevada has the ninth-highest unfunded liability per capita, at $17,568. The Review-Journal also noted Nevada’s rapidly rising pension costs are amongst the highest in the nation. And according to 2013 data provided by the Public Plans Database, Nevada’s pension costs amounted to 9.8 percent of its own source revenue, which was the third-highest amongst all states.
One of the main causes of these high costs is Nevada provides generous pension benefits compared to other states. In a 2014 paper, Andrew Biggs of the American Enterprise Institute found Nevada’s public pension benefits are the highest in the nation, averaging $64,000 per year and totaling more than $1.3 million in lifetime benefits.
Reforming Nevada’s pension system is important, because under current law, if the pension fund ever lacks sufficient funds to pay promised benefits, the state government will be obligated to require taxpayers to cover the shortfall. One matter complicating reform is that the PERS board is by law required to be composed of PERS plan members. This means the people responsible for maintaining and reforming the plan may not have taxpayers’ best interests at heart.
To reform PERS, NPRI proposes a hybrid pension system modeled on similar reforms in neighboring Utah. In 2010, Utah transitioned to a hybrid defined-benefit/defined-contribution system by allowing new employees to choose between a defined-contribution and a defined-benefit pension. Utah’s reforms also limit taxpayer exposure to the pension system by capping government costs; if the cost of maintaining the system increases above 10 percent of employee payroll, employees are required to contribute the difference.
To protect both taxpayers and public workers, Nevada should follow the private sector’s lead and start switching workers from defined-benefit pension systems to defined-contribution plans, such as 401(k) plans. Defined-contribution plans give workers direct control over retirement funds and enables them to change jobs without losing accrued pension benefits. It also allows governments to budget more accurately, because the benefits are a set amount of money each year.
The following articles examine state pension reform from several perspectives.
Need for Pension Reform Becoming More Urgent
Robert Fellner, director of transparency research at the Nevada Policy Research Institute, writes in the Las Vegas Review-Journal about the need for pension reform in Nevada. “Rather than hanging on to a costly, inefficient and prone-to-abuse system, Nevada should switch to a defined contribution system—with Arizona, Utah and the federal government providing examples of successful reform.”
How NVPERS, Step by Step, Made Nevada Government Employees Some of the Nation’s Richest
In this paper, Robert Fellner, director of transparency research at the Nevada Policy Research Institute, examines the legislative history of Nevada’s Public Employees’ Retirement System. “To tell the tale of the troubles facing Nevada’s Public Employees’ Retirement System—and thus, also, the need for serious reform that now confronts the taxpayers of the Silver State—nothing substitutes for a simple walk down Memory Lane.”
Reforming Nevada’s Public Employees Pension Plan
Examining Nevada’s public employee pensions system, Andrew Biggs discovers the funding health of Nevada PERS is poorer than most realize, because the government is using accounting standards laxer than those required for private-sector plans. Biggs argues the state should establish a defined-contribution plan, which is more cost-effective for employees and taxpayers alike.
How Republicans can Succeed where Democrats Failed: Part II
Geoffrey Lawrence discusses the many problems facing Nevada’s pension system and explains how the recent political shift could create an opening for meaningful pension reform.
Study: NV PERS Unfunded Liability Among Top 10 Largest Per Capita
Michael Chamberlain of WatchdogWire discusses a new study which found Nevada’s Public Employees’ Retirement System (PERS) “has the 9th-highest unfunded liability per capita among government worker pension plans at $17,568 and the 10th-highest unfunded liability as a percentage of Gross State Product. According to calculations by State Budget Solutions (SBS) Nevada PERS’s $48.5 billion unfunded liability is 36% of Gross State Product.”
Not So Modest: Pension Benefits for Full-Career State Government Employees
Examining the benefits paid to state and local government employees, Andrew Biggs of the American Enterprise Institute argues drastic benefit reductions for current retirees would be unfair, but reforms to make public- and private-sector pensions more equitable should be on the table.
The State Public Pension Crisis: A 50-State Report Card
This 50-State Report Card from The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some states. The report ranks each state according to the operation and relative disposition of its pension plan and suggests ways states could solve their pension system problems.
Keeping the Promise: State Solutions for Government Pension Reform
The American Legislative Exchange Council describes the variety of pension plans governments use today and the advantages and disadvantages of each. It also provides several tools legislators can use to ensure governments can affordably fund their employees’ retirement benefits.
The Real Cost of Public Pensions
Jason Richwine explains how to calculate the cost of public defined-benefit pension plans, compares the cost of these systems to private-sector retirement plans, and refutes two of the most common arguments suggesting public pension benefits are modest.
The Municipal Government Debt Crisis https://heartland.org/publications-resources/publications/the-municipal-government-debt-crisis?source=policybot
The Heartland Institute and Truth in Accounting (TIA) conduct a comprehensive analysis of Cook County’s taxing districts. “It reveals how officials in many districts have been misrepresenting their financial condition by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt,” the authors wrote. The study found several taxing districts in Cook County, Illinois face an even worse financial burden than cities currently in the news, such as Stockton, California.
Research & Commentary: Public Pensions and the Assumed Rate of Return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change projected rates of return on pension-fund investments.
Fixing the Public Sector Pension Problem: The (True) Path to Long-Term Reform
Richard Dreyfuss of the Manhattan Institute examines various state pension reform efforts and recommends they shift to defined-contribution plans: “Under such plans, to which employees as well as employers may contribute, investment risk is borne by plan members, not by taxpayers. A majority of Fortune 100 companies have already adopted such plans. Only 16 percent of large companies still offer their retirees medical coverage. By sharing risks with the beneficiaries, states and municipalities would be able to devote far more of their time and resources to the more immediate concerns of today’s voters and taxpayers.”
State Pension Funds Fall Off a Cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. They examine two case studies – Public Employee Retirement Association of Colorado (PERA) and Kansas Public Employee Retirement System (KPERS) – in-depth to explore fatal flaws causing funding crises in these plans.
The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
https://heartland.org/publications-resources/publications/the-gathering-pension-storm-how-government-pension-plans-are-breaking-the-bank-and-strategies-for-reform?source=policybot The Reason Foundation considers the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions and explaining why the current system is a disaster in the making.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute State Government Relations Manager John Nothdurft at [email protected] or 312/377-4000.