Nevada’s Public Employee Pension Plan Has $9.1 Billion Unfunded Liability

CARSON CITY – Nevada’s political leaders have emphasized repeatedly in recent months that the state faces a huge funding shortfall in 2011, perhaps as much as a $3 billion hole that will make the recent special session battle over cuts and new revenues pale by comparison.
But the state faces another financial challenge that some suggest may be even more difficult to address: a public employee pension system that has an unfunded liability of $9.1 billion as of June 30, 2009.
A recent study of state and local government pension funds identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan. Nevada’s plan, where annual contributions by the state, local governments and public employees are invested in stocks, bonds and other instruments, is less than 80 percent fully funded, according to the examination by the Pew Center on the States issued in February 2010.
The study concluded in part: “In the midst of a severe budget crisis – with record-setting revenue declines, high unemployment, rising health care costs and fragile housing markets – state policy makers may be tempted to ignore this challenge. But they would do so at their peril. In many states, the bill for public sector retirement benefits already threatens strained budgets. It will continue to rise significantly if states do not bring down costs or set aside enough money to pay for them.”
The analysis by the Pew Center on the States found that as of Dec. 31, 2008, Nevada’s pension liability totaled $30.6 billion for current employees and retirees, with $7.3 billion of that amount unfunded for a 76 percent funded rate.
Dana Bilyeu, executive officer of the Public Employees Retirement System (PERS), said that unfunded liability is now at $9.1 billion. At its high point the plan was 85 percent funded in 2000. It now stands at 72.5 percent.
Bilyeu says the long-term liability will be funded over the next three decades and that major changes to the plan are not needed. The plan is being funded annually to the tune of $1.3 billion in contributions from all participating state and local governments and their employees, and those contribution rates are reset every two years to ensure it remains on strong financial footing, she said.
“To me, when you talk about public pension plans being in jeopardy, you need to focus on places where they are ignoring their responsibilities,” Bilyeu said.
Both Illinois and Washington state, for example, take contribution “holidays” where money that is supposed to go into the retirement plans is diverted to other uses, she said.
While the recent downturn in the market had a significant negative effect on the plan, people must remember that it is managed on a 60-year basis, not on a five- or 10-year time frame, she said.
“You either believe in the long-term financing approach or you don’t,” she said. “Nevada has embraced the long-term financing approach.”
Not everybody agrees with Bilyeu’s optimistic assessment. The Las Vegas Chamber of Commerce and the SAGE Commission, a panel established by Gov. Jim Gibbons to find efficiencies and save money in state government, have both recommended reforms to reduce the cost of the public pension system.
Cara Roberts, director of public relations for the Chamber, said regardless of state funding or the current economic climate, the state and local governments are providing benefits not found in the private sector.
“These promises we make do indeed have a real long term cost,” she said. “I suppose if there is a silver lining to the budget crisis, it is that fact we’re finally coming to the realization of where our taxes are actually going and whether those decisions truly reflect our priorities.”
The Pew report says there is a risk to states as they work to fully fund their plans due to market downturns such as the 2008 meltdown. Another issue is whether the generous retirement benefits provided by many of the plans, including Nevada’s, is siphoning limited tax revenues away from programs and services including public education.
While many Nevada officials and others believe there is a need to reform Nevada’s pension plan, they also acknowledge such reforms will be difficult to achieve. There has been a general consensus among many policy makers that changing the plan for current employees would not be fair since they entered the public sector workforce with certain expectations about retirement. Any changes made going forward for new employees only will take decades to bring about any definitive results.
Bilyeu said besides the fairness issue, there is a legal prohibition on making changes to the plan for current employees. Contributions made by employees are a form of deferred compensation, and altering the agreement with them would violate the contracts clause of both the U.S. and state constitutions, she said. The Nevada Supreme Court has issued an opinion on this issue, Bilyeu said.
Lynn Hettrick, deputy chief of staff to Gibbons, said one solution would be to change the plan from a “defined benefit” plan, where a specific pension amount is guaranteed on retirement, to a “defined contribution” plan, where set amounts of funds are contributed. This is the way most private companies operate, he said.
Usually in such plans the employee is responsible for making investment choices and so there would be no long-term liability on behalf of the state or local government.
But that is unlikely to occur in the short term because of the economy, he said.
“I don’t think we can get there right now,” Hettrick said.
Shifting to a defined contribution plan for new employees would require the state to cover the current unfunded liability in the defined benefit plan, which would then be closed to new participants and phased out over time.
“Given the current financial situation, that is not going to occur,” he said.
Hettrick said Gibbons does want to address the unfunded liability issue, but in the 2011 session, it may be a situation where some less sweeping changes are proposed, such as setting a minimum retirement age at 62 for all retirees. But if such changes are made on a going-forward only basis, such as those approved in 2009, there won’t be any short-term fix to the unfunded liability, he added.
“We need to bare bones the program and still provide a reasonable retirement,” Hettrick said. “People are living longer and working longer.”
Hettrick said also the Pew Study makes it clear the unfunded liability issue must be addressed by the governor and Legislature.
Assemblyman Ty Cobb, R-Reno, is one lawmaker who is skeptical of Bilyeu’s optimistic view of the health of the plan. He proposed the creation of a defined contribution plan in the 2009 session as some states have already done, but his bill did not get a hearing in the Democrat-controlled Assembly.
“The director of the system keeps saying, no matter what the outlook, that we’re doing fine, don’t worry about it,” he said. “But we have a huge unfunded liability, and we have to account for it.”
As to the Pew study, Cobb said most lawmakers and policy makers have known for some time the unfunded liability is a concern that needs attention.
But there is too much focus on partisan politics in the Nevada Legislature and not enough on major policy issues, he said. A change in the current climate would have to come from the grassroots level, Cobb said.
This is the first in a series of stories about Nevada’s public employee pension system.
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Audio files from this story

[Audio][3 files]: Bilyeu on long-term financing; Hettrick on Government Action; Hettrick on Pew Study

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