Nevada PERS must be fixed
Inside Liberty Watch Today - June 5, 2006
The financial markets’ turmoil this spring surely has all employees watching their 401K balances nervously. A few weeks ago, the talking heads were speculating on when the Dow Jones Industrial Average would crack the 12,000 mark. Now, after a tumultuous couple of weeks, the DJIA is barely staying above 11,000. Those invested in US stocks have made essentially zero this year, and with bond yields rising, bond prices have fallen.
But state and local employees in the Public Employees’ Retirement System of Nevada (NVPERS) are sleeping soundly. After all, NVPERS is a defined benefits program. Nevada taxpayers fund money into NVPERS on behalf of their employees and the employees are promised a defined income stream in retirement.
Those of us jockeying our own 401K defined contribution retirement plans, not only fund our own retirement programs with our own money (with an employer contribution in some cases), but we must become our own investment gurus, stewarding our investments to insure that a nest egg will be waiting at retirement age to provide for our golden years. If we don’t save or don’t invest well, we will work until death.
Of course those in the private sector have Social Security to rely on. In fact, I just received my statement from the Social Security Administration indicating that if I keep working until what they now refer to as “full retirement age” or 66 and one-half years of age, I’ll be looking at collecting $2,129 each month. My best guess is that a couple of grand a month won’t go very far 18 years from now. If only I could opt out of the system.
Compare my couple grand a month payment estimated by Social Security with the average monthly compensation at retirement presented in the statistical section of the Comprehensive Annual Financial Report of the Public Employees’ Retirement System of Nevada for the fiscal year ended June 30, 2005. Listed on page 91, schedule 10, the average monthly compensation at retirement for regular state and local government employees as of June 2005 was $4,600 per month. For police and fire retirees, the average was $6,578. The report also indicates that the average age at retirement for regular state employees is 59, and is even lower for police and fire members who retire on average at age 55, quite a bit short of what the Social Security Administration considers full retirement age.
But while it promises generous benefits, NVPERS ability to meet these obligations continues to deteriorate. From July 1, 1949 to June 30, 2005 membership in NVPERS has grown from 3,000 members and 64 retirees to 93,995 active members and 30,999 retirees and beneficiaries. As Nevada’s state government has mushroomed, so has the promises made to its state and local employees with taxpayers ultimately holding the bag.
NVPERS sported assets of just short of $17.9 billion as of June 30, 2005. Unfortunately the plan’s actuarial accrued liabilities totaled $23.6 billion. Thus, NVPERS is underwater to the tune of $5.7 billion. Two years before, NVPERS had assets with a market value of $14 billion, but had actuarial liabilities of $19.5 billion. The unfunded liability continues to grow.
This deterioration is accelerating at a rapid pace, as is clearly illustrated on page 40 of NVPERS Annual Report. Since June 30, 2000 unfunded actuarial accrued liabilities as a percentage of payroll for the regular state employee fund has nearly doubled from 67.7% to 124.9% at June 30, 2005. For the police/fire fund this ratio has increased from 131.5% to 222.8%.
Viewed another way, the actuarial value of assets as a percentage of total actuarial accrued liability for the regular state employee fund has dropped from 85.9% at June 30, 2000 to 77.3% as of June 30 last year. The police/fire percentage has fallen from 79.5% to 69.8%.
Noting the $5.7 billion liability in the notes to the NVPERS financial statements, the report indicates: “The unfunded accrued liability is amortized using a year-to-year closed amortization period where each amortization period is set at 30 years. This presumes each year’s change in unfunded liability will be fully paid in 30 years from inception.”
So everything is OK because even if the liability increases each year, these increases will be paid off in 30 years, just like a home mortgage. This of course is madness. “Would you incur debt based on the prediction that your house will continue to appreciate for the next 30 years at the same rate it has appreciated over the past five years?” asks Orange County Register Columnist Steven Greenhut. “I didn’t think so.”
How NVPERS goes a little deeper in the hole each year is illustrated in its annual report. For the year ended June 30, 2005, additions to the trust funds decreased $115 million, “due mainly to a decrease in net investment income of $209.6 million, offset by an increase in contributions revenue of $93.4 million,” according to the annual report “Introductory Section,” penned by NVPERS Executive Director Dana Bilyeu. “Deductions increased by $83.8 million, due primarily to an increase of $82.2 million in benefit payouts.”
State and local governments hire more people, forcing taxpayers to increase contributions to the fund. In 2005, taxpayers contributed $875.5 million to NVPERS, while members contributed $130.6 million. In 2000, taxpayers contributed just short of $605 million, while members paid in $56.8 million. But, with low interest rates and a roller-coaster stock market, investment gains are down and of course with more and more state and local employees retiring in their mid to late 50’s, payouts are increasing.
And why wouldn’t the average, especially police or fire, employee retire in their peak years? A regular member employee can retire at any age with 30 years of service. Police and fire employees can retire at any age with 25 years of service and at age 50 with 20 years of service. A NVPERS member retiring after July 1, 1977 and “is an active member whose effective date of membership is before July 1, 1985, is entitled to a benefit of up to 90% of average compensation.”
No doubt there are plenty of cops and firemen who started in their early-20’s, worked 25 years and decided to hang up their guns and hoses to draw most of the pay they were receiving while on the job. Now they don’t even have to show up. Who can blame them? And, given the good health most of these employees enjoy, taxpayers will likely be funding their retirements for more years than the employees were on the job. These are the employees with the most experience, likely the best at what they do, and have a number of years of good health in front of them, yet the incentives are in place for them to leave and either start new careers or take it easy for 30 or 40 years. Plus, replacements must be hired to fill those positions: A double whammy for taxpayers.
NVPERS is in the same boat as most other state retirement systems. In its 2006 report on state retirement systems, Wilshire Consulting, estimates that of the 58 state retirement systems reporting data for 2005 (including NVPERS), 84% are under funded. Of the 104 state retirement systems only having data through 2004, 87% are under funded.
As the US population ages, and the agitation to close the borders increases, the stress on funding pension promises will increase dramatically unless changes are made now. There are city governments already on the brink of bankruptcy because of crushing pension obligations. Which Nevada lawmaker will be gutsy enough to champion a plan to convert NVPERS from a defined benefit retirement program to a defined contribution retirement program during the 2007 Legislature?
Doug French, Liberty Watch Columnist
Liberty Watch On-Line
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Phone: 702-385-3320
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