CARSON CITY – Gov. Brian Sandoval is taking a measured approach toward changes to Nevada’s public employee pension plan, but at least one state lawmaker says action is needed now.
“There are a number of red flags that have popped up for me that are cause for concern, and they should cause anyone in the system today and already retired, concern as well,” said second-term Republican Assemblyman Randy Kirner.
The Reno lawmaker has requested a bill for the 2013 legislative session that would significantly alter the current defined benefit pension plan – but only affecting future state and local government employees – to get a handle on a long-term unfunded liability that hit $11.2 billion as of June 30, 2012. The unfunded liability has grown by $1.2 billion over the past two years.
Kirner’s bill, which is still being drafted, would create a hybrid plan with about a third of the pension in a defined benefit and two-thirds as a defined contribution. There would also be a contribution aimed at reducing the unfunded liability.
Dana Bilyeu, executive officer of the Nevada Public Employees’ Retirement System, said she can’t comment until the bill is introduced. But in an email response, she said the overall funding of the existing plan improved in fiscal 2012. It has performed well both in the short and long term, she said.
HOW PENSION PLANS WORK
The current public pension plan is a defined benefit plan, where employees receive a guaranteed pension upon retirement based on salary and years of service. The plan has created a long-term and ongoing financial obligation for state and local government. Such obligations have become a concern for public officials nationwide.
Defined contribution plans have many similarities to the 401(k) retirement plans offered in the private sector. Their appeal is that they do not create any long-term financial obligations for the state or local governments.
A few states, including Indiana, Oregon and Washington, have implemented such hybrid plans. Nevada’s plan is different from many others around the country, however, because public workers do not participate in Social Security.
Sandoval, a Republican, backs an independent study of the existing pension plan, a study not expected to be completed until after the legislative session that starts today is over.
Kirner said any delay in taking action will just exacerbate the problem.
“My concern there is we could go another two years and be another $1 billion in the hole,” he said.
The plan saw a 2.9 percent return on its investments in 2012. There was a record 21 percent investment gain in 2011, but over the past decade it has not achieved the 8 percent return projected by PERS, Kirner said.
Because of the lower investment returns, contribution rates required to help fund the plan have risen, he said.
For the upcoming two-year budget, retirement rates would climb 2 percentage points to 25.75 percent of most public worker salaries. The increase will cost those public employees who contribute to their retirement and their employers about $10 million a year in total.
If approved as expected, contribution rates will have increased in six of the past seven budgets, Kirner said.
FUNDED RATIO DROPS
Nevada’s pension plan for about 100,000 active state and local government workers and more than 40,000 retirees, including police and fire, was 85 percent fully funded in 2000, but was only 71 percent fully funded in 2012. The 2012 number was a slight improvement from the 70.2 percent reported in 2011.
“How long can this continue is my question,” Kirner said.
But Bilyeu said the return over the most recent 10 years, which she noted included the worst 10-year period in the history of U.S. stocks, still reached 7 percent annually. For the past 28.5 years, the return has averaged 9.5 percent.
Bilyeu also noted that the increase in contribution rates is due to a shrinking public workforce and payroll. Since the height of membership in the system, 9,000 covered positions have been lost. Projected payroll for the coming biennium is more than $330 million less than the previous biennium, she said.
Bilyeu said the unfunded liability is just one measure of the plan’s overall health. The most important is whether the fund receives the level of contributions required by an independent actuary, which consistently has been the case in Nevada, she said.
DETAILS OF KIRNER’S PROPOSAL
Kirner said he would mandate participation in the defined contribution part of the plan, and require public employees to pay half out of their own salaries.
The defined contribution portion of the plan would also be portable for Nevada public workers, a selling point for younger, more mobile adults, he said.
He would also have PERS manage the new hybrid plan as well. Changes would not come until the 2014-15 year to give time to prepare for the shift.
While optimistic that he will get a hearing on his proposal in the Democratically controlled Assembly, Kirner acknowledged it will be an uphill battle against opposition from public unions.
Nick Di Archangel, spokesman for the Nevada State Education Association, said the teachers group will strongly oppose any change to the current defined benefit plan.
“We don’t support any plan that tries to cut the way PERS is funded,” he said. “When you start talking about defined contributions, you are talking about disrupting the funding flow. Even small changes will create a slippery slope towards undermining the whole system.”
North Las Vegas Police Sgt. Leonard Cardinale, a member of a public employee coalition called We Are Nevada, said Kirner’s proposals are unnecessary and potentially harmful because they would divert contributions from the plan, which could put it in financial jeopardy.
Contact reporter Sean Whaley at
email@example.com or 775-687-3900.