January 14, 2022 - 9:01 pm
Even a monster yearly return couldn’t dig Nevada’s Public Employees’ Retirement System out of its fiscal hole.
Last year, PERS’ investments generated an annual return of 27.3 percent for the fiscal year that runs from July to June. It generated those returns by investing in the stock market. Its return in U.S. stocks topped 40 percent. In its private equity investments, the return was more than 67 percent.
Many people don’t grasp that the health of Nevada’s public pension plan depends on a thriving private sector. Remember that the next time government unions attack private companies.
The bad news is that PERS’ fiscal health remains in shambles. A decade ago, PERS’ funded ratio — the relationship between its assets and its obligations — was around 71 percent. Since then, the country — and PERS — experienced several years of strong economic growth under Donald Trump. Last year’s dramatic COVID-related investment returns should have pushed PERS close to a 100 percent funding ratio. Right?
Nope. PERS’ current funding ratio is just more than 75 percent for both its regular and police/fire programs. Its unfunded liability is more than $9 billion. That’s around Nevada’s entire general fund budget for two years. If PERS assumed a more realistic 6.25 percent rate of return, its unfunded liability would soar to higher than $18 billion.
Unlike some states, Nevada hasn’t been holding back its required contributions. Just the opposite. For normal employees, the current combined contribution rates are 29.75 percent. For police and fire employees, the rate is 44 percent. Ten years ago, the rates were 23.75 percent and 39.75 percent, respectively.
Part of the reason that PERS’ funding ratio hasn’t improved more is that the system changed a number of assumptions over the past decade. Its previous assumptions were too optimistic. That means PERS didn’t collect enough contributions from employees in decades past to pay for their full retirement costs even after investments returns. Current taxpayers and employees are stuck paying off that debt through higher contributions.
That cycle looks likely to continue. It doesn’t take a financial genius to know a bumpy stretch for the market is inevitable. If the Federal Reserve increases interest rates to limit inflation, stocks are likely to go down. If that happens, PERS’s unfunded liability would increase even more.
PERS’ past mistakes led to today’s higher contribution rates. Even a remarkable year of returns couldn’t wipe that away. PERS has a long history of overly rosy assumptions. Lawmakers need to move the state to a new model — involving more realistic expectations and defined contribution plans — that protects future taxpayers while providing public employees an appropriate retirement.