McGinness urges funding changes to public pension system

CARSON CITY -- The Legislature needs to change how it funds the Public Employees Retirement System so it does not burden state and local governments with ever increasing costs, new state Senate Minority Leader Mike McGinness said Thursday.

McGinness, R-Fallon, wants to switch new-hired employees to a "defined contribution" system, similar to the 401(k) retirement plans offered by many private companies. He has not yet submitted a bill to carry out the proposal.

Under the defined contribution system, the money the government and the employee pay for retirement would remain at a fixed percentage of the employee's pay. What employees receive for retirement would depend on how well those funds appreciate through their own investment strategies.

PERS, however, might come up with its own reform plans even before the Legislature meets in February. The board of the agency, which has 103,000 members and 40,000 retirees in the state, will meet Dec. 15 to discuss the results of a study commissioned in May to look at other ways to pay retirement benefits.

Under PERS' current "defined benefit" plan, retirees know in advance how much they will receive in retirement pay, regardless of whether investments appreciate or decline. PERS now invests on their behalf, trying to achieve 8 percent or higher annual gains.

Under the defined contribution plan, PERS Executive Officer Dana Bilyeu said, "the risk of the investments shifts to the member." Retirees whose investments fail could quickly run through their retirement nest eggs.

Chances of McGinness' proposal winning legislative approval are uncertain. Democrats have majorities in both houses of the Legislature, although by smaller margins than the 2009 session.

But last year, then Assembly Majority Leader John Oceguera, D-Las Vegas, engineered a bipartisan agreement that cut $140 million in potential PERS' liabilities largely by increasing the ages of when newly hired employees can retire and receive full benefits.

Oceguera, now the Assembly speaker, was not available for comment on McGinness' proposal, which was pitched by Kenny Guinn when he was governor.

Under the existing PERS system, the employee is guaranteed that he will receive the retirement promised by his government employer. PERS has a retirement estimator available for employees on its website.

Largely because of a stock market crash in 2007 and other declines over the past decade, PERS' investment earnings have fallen short of expectations. The agency faces an unfunded liability estimated at $10 billion as of June 30.

To cover all current and future pensions, PERS eventually needs to increase its investment income or have employees and state and local governments contribute additional revenue.

A plan is in place to reach 100 percent funding over the next 25.5 years by periodically increasing what both employees and their employers pay into PERS.

The "mortgage payment" that state and local governments pay toward the unfunded liability next year will increase by about $15 million, Bilyeu estimates.

Employees themselves also are paying that amount of additional money toward the debt. Through collective bargaining agreements, however, all of some local government employees' pension costs are paid by their employers.

Most Nevada public employees and their employers each pay 10.75 percent of the employee's wages into the retirement fund. Those rates will increase to 11.875 percent on July 1, Bilyeu said.

"We need to look at that," McGinness said. "We need a long-term solution to that debt so what happened in Greece doesn't happen to us."

Greece last summer had to borrow $140 billion and suffered a near financial collapse in part because of a pension plan that allowed some to retire at age 50.

The Pew Center for the States found in February that only five states have fully funded retirement plans, and there now exists a $1 billion gap between the $2.35 trillion that states presently have to pay for pensions and the $3.35 billion they eventually will need to pay.

In a 2008 study, the Las Vegas Chamber of Commerce called Nevada pensions "among the nation's most favorable public employee pensions." It found a 30-year employee retiring with an annual salary of $50,000 would receive a $37,380-a-year pension for the rest of his life.

But at the same time, the chamber said state and local government outlays to cover employee retirement benefits were the seventh lowest in the nation. Unlike in Nevada, most states also make Social Security payments, in addition to providing pension funds.

Bilyeu said the typical public employee in Nevada receives a $2,500-a-month pension and most do not work 30 years. They retire at an average age of 60.

PERS participants have vested rights to pensions they have been promised, McGinness said, and the pensions could not be reduced or the mechanism for funding the pensions changed. Newly hired employees could be switched to a new, less expensive and lucrative system.

"Future legislatures would have an easier time," McGinness said. "Nearly every state and municipality, everybody is having the same problem."

Contact Capital Bureau Chief Ed Vogel at evogel@ or 775-687-3901.