EDITORIAL: Report highlights need for pension reform

Defenders of Nevada’s public employee pension plan will point to a new report as evidence that the retirement system is sound enough to be left alone by the 2015 Legislature.

But if that’s the case, why does it need a nearly 10 percent increase in its primary contribution rate? And why won’t that substantial funding boost be enough to come close to fully funding benefits for current and future government retirees?

The simple answer is that the Public Employees’ Retirement System of Nevada isn’t sustainable, and that without major reforms, it will become a worsening drain on the operating funds of the state and all local governments.

A report prepared for the PERS board by Segal Consulting determined the pension fund, with $33.5 billion in assets as of June 30, is 71.5 percent funded. The fund is in worse shape than it was in 2009, when it was 72.5 percent funded, and is far worse than it was in 2000, when it was 85 percent funded.

“Basically, we’re headed in the right direction,” PERS Executive Officer Tina Leiss told the Review-Journal’s Sean Whaley.

Not exactly. Because investment firm Morningstar Inc. says any pension plan that is at least 70 percent funded is “fiscally sound,” the taxpayers who are on the hook for unfunded benefits are supposed to feel secure? Please. The system’s multibillion-dollar unfunded liability — the amount of promised benefits that can’t be paid — is one of the 10 highest in the country as a per-capita burden and as a percentage of gross state product, according to a 2013 study by State Budget Solutions.

Although the PERS portfolio realized a 12.4 percent return on its investments in 2013 — it needs to realize an aggressive 8 percent annual return to prevent its funding ratio from falling much more — the report recommended increasing the contribution rate for non-public-safety employees by 2.25 percentage points, from 25.75 percent to 28 percent of salary. (The contribution rate for public safety workers will remain at 40.5 percent of salary. 40.5 percent!) The PERS board accepted the report Wednesday, and state law requires the Legislature to adopt contribution rates approved by the board.

Effective July 1, the state and all local governments, including school districts, will have to boost their already massive retirement contributions to the system, wiping out millions more dollars in revenues. Although governments are supposed to split any increase in pension contributions with employees, governments typically award bargaining groups pay raises to cover increases in employee payments. And local governments generally cover an employee’s entire pension contribution.

Wednesday’s action by the PERS board blasted a new hole in every government budget, including the 2015-17 state spending plan being prepared by Gov. Brian Sandoval. Schools and services will be squeezed even more, creating additional pressure for tax increases.

PERS’ problems are rooted in overly generous defined benefits, guaranteed for life, that can be collected by government retirees at a relatively young age after as few as 20 years of service. Such plans do not exist in the private sector because no business can afford them. It’s no longer fair to burden taxpayers with the rising costs of retirement benefits that aren’t available to them, when they can barely save for themselves.

The 2015 Legislature must make PERS reform a priority. Future government hires should be moved into a new retirement system, preferably one based on defined contributions like a 401(k), that shifts the risks from taxpayers to employees. The longer lawmakers wait to make such changes, the more the public pays — and the less public service they get in return.