Study calculates high cost of changing Public Employees Retirement System

CARSON CITY -- Switching how the Public Employees Retirement System of Nevada is funded would cost public employers and employees an additional $1.2 billion over the next two years, a study by a Chicago consulting firm has found.

But in the long run -- about 20 years -- a defined-contribution plan would be less costly than the current system, a consulting firm official said in response to questions.

The study, released Wednesday, was commissioned in May by the PERS board because of talk that state legislators next year might want to switch to a defined-contribution method of funding retirement rather than the current defined-benefit method.

Under defined-contribution plans, which are popular in private industry, employers pay a fixed percentage of an employee's income into a retirement plan, often into a 401(k) plan. What employees receive in retirement benefits depends on how well their investments do. Under defined-benefit plans, set payments are guaranteed the retiree until death.

The PERS board is made up of former and current public employees.

In a 2008 study, the Las Vegas Chamber of Commerce called Nevada's public 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.

The $1.2 billion in additional costs would result because existing employees and retirees would have a contract right to the pensions they have been promised if PERS changed the way retirements are funded.

To secure those benefits at a time when the PERS system is $10 billion short of what it eventually will need to cover those pensions would require both public employers and employees to pay much higher contribution rates.

Those rates, now 10.75 percent of employee's wages, would increase to 17 percent next year if PERS changed to a defined-contribution system, according to the Segal Co. study.

The contribution rates are paid both by employers and employees, although employers make the entire contribution under collective bargaining agreements in some counties.

"We wanted to make sure the Legislature had the information on hand before they make changes," PERS Executive Officer Dana Bilyeu said during a board meeting Wednesday.

State Senate Minority Leader Mike McGinness, R-Fallon, said in November that he intends to introduce legislation to change PERS funding methods when the 2011 session opens Feb. 7.

McGinness reiterated Wednesday that he wants only to look at changing the retirement funding plan for employees hired after July 1 and not to change how benefits are funded for current retirees and employees.

"They are talking about changing it for everyone," he said. "I don't think anyone would consider that with a price tag that big."

Marty Bibb, president of Retired Public Employees of Nevada, an association that protects the interests of retirees covered by PERS, said it would be a "mistake" for legislators to change the retirement plan.

"This is an excellent and sound retirement system," Bibb said.

His comments were echoed by Craig Stevens, government affairs director for the Nevada State Education Association, which represents schoolteachers and support personnel.

"Why change a system that works?" Stevens asked. "You would put a huge burden on taxpayers. The governor will see this plan will cost a lot more money during a time of recession."

Bibb said Nevada has the lowest number of public employees per 1,000 persons in the nation and that the public employee retirement costs in the state are the seventh least expensive.

That is largely because in most states, public employers and employees also pay 6.2 percent of each employee's income toward Social Security in addition to maintaining public retirement plans. Because they don't pay into Social Security, most public employees in Nevada do not quality for Social Security benefits.

Kim Nichol, senior vice president for the Segal Co., a Chicago-based human resources consulting firm, found little good in her study to say about defined-contribution plans. Segal has done studies for PERS for several years.

"Some see this as a silver bullet," she said. "That is just not the case."

Nichol said defined-contribution plans put all the risk of making proper retirement decisions on the employees. Instead of prudently managing their retirement benefits, retirees sometimes spend a lot of money on a "retirement home" and blow their nest eggs before they turn 70 or 75, she said.

Because some people are living to 90 and older these days, Nichol said, their poor management of the funds could leave them destitute.

But her analysis was challenged by Carole Vilardo, president of the Nevada Taxpayers Association. Vilardo said PERS could manage investments under a defined-contribution plan and limit the amount that retirees could withdraw each year.

Vilardo, however, was not surprised by the costs found in the study. Her group once supported changing how PERS was funded but then backed off.

"Economically, it is not feasible to make the change at this point," Vilardo said. "In the future, when economic conditions improve and we have a surplus, we can look at doing it."

Retirees cannot spend off all their benefits under PERS' current defined-benefit funding plan. Instead they are guaranteed a fixed income for as long as they live.

However, contribution rates are not fixed as they are with a defined-contribution plan but increased periodically to cover long-term liabilities.

Those increased costs have led to a debate on whether local, state and federal government employers can continue to absorb costs of what some believe are overly lucrative pensions.

About 40,000 retired public employees in Nevada receive benefits, and 103,000 public employees work and make contributions. Both employees and employers pay about 10.75 percent of the employee's pay toward retirement, which then is invested by PERS.

Largely because of drops in stock market earnings several times over the past decade, PERS' $23 billion in current investments is $10 billion short of what will be needed to pay all guaranteed retirement benefits.

To cover the shortfall, contribution rates are being gradually increased over the next 25.5 years. Contribution percentages will increase to 11.8 percent for both employees and employers next year.

Despite the attention about underfunded public employee retirement systems, Bilyeu said, only a couple of states have switched to defined-contribution plans. Alaska made the change several years ago. Teachers, who had been paying 12.5 percent of their income into retirement had to pay 25 percent. Similar increases were paid by their public employers.

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.

Bilyeu said private companies' defined-benefit plans now face a greater unfunded liability than public plans.

Earlier she said the typical public employee in Nevada receives a $2,500-a-month pension. Most do not work the 30 years needed for a full pension. Employees on the average retire at age 60.

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