Analysis concludes PERS is underfunded

CARSON CITY -- A new analysis by a conservative think tank concludes that the long-term liability facing the Public Employees Retirement System is four times greater than what taxpayers have been told.

The Nevada Policy Research Institute, based in Las Vegas, said the retirement system for more than 140,000 current and retired public employees is $41 billion short of what it needs to pay for future pensions, far greater than the $10.4 billion estimated by the agency.

"The true funding health of Nevada PERS is far poorer than most realize, due to accounting standards that are far more lax than those required for private-sector plans," said Andrew G. Biggs in his report, "Reforming Nevada's Public Employees Pension Plan."

Biggs cited different estimates for the retirement system's investment earnings, because of the economic slump, as the biggest reason for the discrepancy.

His analysis, released today , is important to taxpayers because if he is right, they may pay more to cover their share of retirement benefits.

He contends annual contributions to fund public employee retirements in Nevada are $1.6 billion but must be increased to $5.8 billion to cover the real liabilities.

Retirement system Executive Officer Dana Bilyeu does not dispute the number given by Biggs but maintains her agency and similar ones across the country are bound to follow federal Governments Standards Accounting Board rules in how they calculate liabilities.

"This is all financial theory," she said. "I can't say it is right or wrong. This is a fight between accountants and actuaries. We are trying to do the best we can for our beneficiaries."

Bilyeu said Biggs and others who do not like how the government standards board works are showing their criticism through reports like this one. In response to questions, Biggs said his main concern is that "we get the accounting right."

He said that the "contingent liability" facing public pension plans "is simply ignored under the current accounting standards" and that his method is a better way of calculating the debt.

"All around the country, you can see that it's not some anthropomorphized government that bears the risk, it's people, be they taxpayers, bondholders, government employees or beneficiaries of other government programs that are being squeezed so we can make our pension contributions," he said.

The primary reason for the differences in the debt calculation is because the retirement system anticipates earning an 8 percent annual return on investments, while Biggs contends it will be much less, maybe as low as 4 percent, although in an interview he said he is not necessarily saying it will be 4 percent going forward.

The retirement system has been operating for the past few years under a plan to clear the debt. The Legislature, which reviews its investment returns every other year, has been increasing the contributions paid by employees and their agencies to cover the liability with the goal of wiping it out in 26 years.

If the retirement system wants to end the ongoing increases in costs to taxpayers, then Biggs proposes it switch to a "defined contribution" pension plan in which what public employees and employers pay for retirement does not change when investment returns fall.

Under the current "defined benefit" system, pensions received by public employees are guaranteed, regardless if the plan earned enough on investments to cover the cost.

What employees receive in pensions is based on their final salaries and years of service. The pensions are 55 percent greater than what is earned in Social Security and 401(k) pensions by private employees receiving the same salaries, Biggs said.

Legislators, however, have ignored pleas to switch to defined contribution plans, contending that offering good pensions attracts better employees.

A Segal Co. study commissioned by the retirement system in December found switching to a defined contribution plan would add $1.2 billion to pension costs over the next two years and remain more expensive than the current defined benefit plan for the next 20 years.

Despite his objections, Biggs, a former deputy commissioner of the Social Security Administration and now an American Enterprise Institute resident scholar, praises the Nevada retirement system as "one of the better-funded, public-sector pensions due to sound management and consistent government contributions."

The Nevada Public Research Institute, however, has been a consistent critic of the retirement system at the Legislature.

Unlike private pension plans, public pension plans anticipate higher future returns "before the returns have actually been earned," Biggs said.

When the expected return does not materialize, taxpayers are stuck with a "contingent liability to bail out the fund," he said.

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