Taxpayer liability may be lowballed

If you want to have a lot of really short conversations, you can become an anesthesiologist, or you can try to talk to people about unfunded government pension liabilities.

"Ten, nine, eight ... snore."

So let's keep this simple: Nevada's Public Employees' Retirement System is what's called a "defined benefits" plan. Government workers often retire around age 59, at which point they've been promised not "whatever you've contributed, plus or minus your gains or losses on the market" (as private-sector workers are accustomed to) but rather a specific ("defined") pension -- generally a healthy percentage of their final-year salary.

And today, officially, PERS' unfunded liability -- the part future taxpayers are contractually obliged to pay -- stands at a record $9.1 billion, nearly four times what it was a decade ago.

That's $3,500 for every Nevada man, woman and child. But what if even that turns out to be a low-ball figure?

"In actuality, PERS' official estimate of $9.1 billion may understate the size of the system's unfunded liability," advises Geoffrey Lawrence, a fiscal policy analyst at the Nevada Policy Research Institute. "That estimate relies on the highly optimistic assumption that PERS will be able to do in the indefinite future what it has been unable to do in the recent past -- average an 8 percent rate of return annually on investments."

In real life, PERS administrators haven't met that goal in years. Over the past decade, PERS averaged only a 3.83 percent annual return on investment. For the past two years, PERS "has experienced a negative rate of return as the economic recession has led to deterioration in stock values."

In Fiscal Year 2009 alone, PERS lost $3.5 billion from the value of its assets -- a 15.8 percent decline in total value.

The prudent response would be for PERS administrators to "downwardly adjust the actuarial assumptions underlying the system's expected yield." So why don't they?

The chief investment officer for Wyoming's public pension system explains: "Nobody wants to adjust the rate, because (acknowledged) liabilities would explode."

A very small adjustment in the anticipated rate of return could have a tremendous impact on the size of the unfunded liability, Mr. Lawrence reported Thursday. Administrators at the Colorado Public Employees' Retirement Association, for example, have estimated that a 0.5 percent reduction in their system's expected rate of return would increase the unfunded liability by 19.6 percent.

PERS is "a ticking time-bomb," NPRI warned a few weeks ago. In Nevada, "The total cost of retiree benefits has increased 186 percent -- nearly tripled -- in nine years. ... Although Nevada taxpayers contributed a record $1.33 billion toward government employees' pensions in 2009 (the employees themselves contributed only $122 million), PERS' contractual commitments continue to outstrip what taxpayers are able to contribute."

More than two decades ago, the federal government recognized the escalating liabilities of its defined-benefits plan for federal workers were unsustainable. Uncle Sam moved to a defined-contribution plan.

But Nevada has not done that -- not even for new hires.

Why not?