Nevada’s pension system is one of the most generous public employee retirement plans in the nation.
Nevada PERS caps benefits at 75 percent of the average of retiring employees’ three consecutive highest-earning years – 90 percent for those hired before July, 1, 1985. The system has no minimum retirement age, as long as the retiree has 30 years of service, and has few employees who are required to actually contribute to their own retirement. PERS has one of the highest formula multipliers used to calculate benefits – either 2.5 percent or 2.67 percent per year of service, depending on employment dates, while the national average is 1.95 percent – while Nevada governments provide some of the highest average salaries in the nation.
Also, Nevada PERS has one of the highest employer contribution rates in the nation. While higher contribution rates are typical of plans that do not include Social Security coverage in addition to a pension – like Nevada’s – the state ranks as one of the highest among plans that do not include Social Security coverage for both regular employees and for police and fire. At the same time, Nevada ranks in the bottom fifth of states with regard to the percent of funded pension liabilities. It is generally assumed that pensions funded at 80 percent or less have a serious problem. Nevada’s is 71 percent funded.
A combination of undue influence of special interests and lack of transparency in Nevada has contributed to the state’s generous retirement structure and the large unfunded liabilities found in both PERS and the state’s retiree health care plan. The adoption of Nevada’s public pension and post-retirement benefits has occurred within a tight circle of individuals – elected officials, public managers and union/employee groups – largely out of the public view. These groups have often failed to insist upon transparency. Union and employee groups have enjoyed considerable influence with legislators on this issue, and public managers often benefit from the very contracts they negotiate.
The issue of public-sector compensation has clearly been on the minds of the nation’s legislators. More than 40 states have passed some type of pension reform over the past several years. Lawmakers have enacted major changes to increase employee contributions; restrict or eliminate future cost-of-living adjustments; increase age and service requirements for retirement; and cap benefits for new employees. Reforms have occurred under both conservative and progressive elected officials. The Democratically controlled Rhode Island legislature passed one of the most far-reaching retirement system overhauls last year by suspending cost-of-living increases and raising retirement ages for existing employees. Many Democratic governors, mayors and legislators have realized that the deficits created in state and local budgets by unsustainable promises to public employees are crowding out essential services and safety-net programs for citizens.
The Nevada Legislature should follow their lead. Some suggested reforms for the 2013 session:
1. Establish a moratorium on any increases to pension benefits until PERS is at least 90 percent funded.
2. Move new public employees away from defined-benefit retirement plans, which guarantee a set income for life, indexed for inflation, to portable cash-balance plans, individual retirement accounts that both the employee and employer contribute to while the employer guarantees a minimum return.
3. Increase both current and prospective employee contribution levels into PERS and abandon the employer-paid option. The issue of how much public employees contribute to their retirement in Nevada is problematic. About 18 percent of Nevada’s public employees actually contribute earnings to the pension fund. They contribute 11.88 percent of their pay. Meanwhile, 82 percent of Nevada’s public employees contribute nothing at all – the government entity that employs them covers all contributions.
4. For future government hires, establish a minimum retirement age, change the formula multiplier (or service credit) for calculating benefits to mirror the national average and exclude longevity pay from benefit calculations.
5. Increase transparency by mandating an outside and independent analysis at the state and local level before any pay or benefit increase, as well as how future costs will be paid for and managed.
6. Reform the civil service system by emphasizing and rewarding performance instead of job security and time served. This would include statewide legislation to mandate performance pay, eliminate seniority, job bumping and other outdated vestiges of civil service. A system that grants salary increases according to seniority rather than performance or merit, and makes pay raises and promotions appear automatic, breeds mediocrity, complacency and inefficiency.
7. Adopt legislation that compels elected bodies to settle contract impasses on pay and benefits instead of an outside arbitrator. Pay increases have a direct impact on pension benefits. All too often, elected officials can avoid their fiduciary responsibility by deferring to outside arbitrators, who do not live in Nevada, to settle contact disputes. Elected officials should be ultimately responsible for controlling employee pay, so they can be accountable to the public for their employee costs.
Although it is important that state and local governments provide a level of compensation that enables them to recruit and retain a talented workforce, it is imperative that the unfunded liability for pensions and other post-employment benefits be addressed in a timely, comprehensive and fair manner. Public employee compensation must be sustainable.
Our elected leaders of both parties must do their jobs and reform this system to protect the public interest.
Thom Reilly is a professor at San Diego State University, a former Clark County manager and author of the book "Rethinking Public Sector Compensation: What Ever Happened to the Public Interest?" (ME Sharpe)