Gov. Steve Sisolak touched on many topics in his State of the State address, but there was one notable omission: the Public Employees’ Retirement System. That’s too bad because Nevada desperately needs a leader who’s willing to confront the problems facing PERS head on.
PERS advocates insist all is well. The numbers tell a different story.
In 2010, PERS’ unfunded liability stood at $10 billion, using PERS own — overly optimistic — assumptions. In July, PERS reported that its unfunded liability was $13.8 billion. If PERS were forced to use the same accounting standards employed in the private sector, that number would exceed $40 billion. PERS’ funded ratio has only slightly increased, from 70.5 percent in 2010 to 75.1 percent in 2018.
The numbers would be worse except that PERS has increased contribution rates dramatically. In 2010, the combined pension contribution rate for nonpublic safety employees and their employers was 21.5 percent. That’s unheard of in the private sector, but as of 2018, that contribution rate is now 28 percent. In July, it’s going to increase to 29.25 percent. That’s a 36 percent increase in fewer than 10 years. That rate increase didn’t fund benefit increases. It simply went toward paying down pension debt. The combined contribution rate for police and fire employees went from 37 percent to 40.5 percent over the same period.
This is especially concerning because the stock market has boomed over the past eight years. Public pension plans, which rely on stocks to generate most of their returns, were underreported beneficiaries of the 2017 Republican tax cuts.
If PERS couldn’t get its fiscal house in order during a bull market and with rising contribution rates, what happens when the market stumbles? We’re about to find out.
Over the first six months of the past fiscal year, PERS’ returns are -3.8 percent. It’d be good if President Donald Trump reined in his misguided trade wars, and the market rebounded. But a correction is coming at some point. When that happens, PERS’ total assets will start to decline, while its obligations continue to grow.
That situation can led to “a death spiral with an ever-shrinking base of assets failing to produce the needed income, leading to asset sales and further declines in income,” Aaron Brown wrote for Bloomberg.
Nevada’s not in as bad of shape as basket cases such as New Jersey, which Mr. Brown projects will have a full-blown crisis in 2023. But the goal of Nevada’s pension system should be solvency, not simply postponing failure to a date later than pension plans in other states.
That’s going to require reform. Reform is going to require leadership. It’s time for Gov. Sisolak to lead.