The Las Vegas Chamber of Commerce recently issued a fiscal analysis brief entitled “An Overview and Comparative Analysis of the Nevada Public Employees’ Retirement System.”   The System was asked to review the study and provide comments to the author.  The links below will take you to the System’s comments provided to the author prior to publication of the report, the System’s letter to the Las Vegas Review-Journal regarding its editorial dated September 9, 2008, and the National Institute on Retirement Security’s letter to the Las Vegas Review-Journal regarding the editorial dated September 9, 2008.   

Just below these links are questions the System received since the Chamber’s report was released and related press items were published, with posted answers immediately following each question.  As more questions come to the System, we will update this list with our responses.

 

  PERS’ initial comments on the Chamber Report-Submitted to Applied Analysis on Thursday, September 4, 2008 (prior to final draft of the report)

PERS’ letter to the Las Vegas Review-Journal-Submitted Wednesday, September 10, 2008

National Institute on Retirment Security’s letter to the Las Vegas Review-Journal-Submitted Tuesday, September 9, 2008

 

Frequently Asked Questions

-on the Press Reports on NVPERS

 

1.         The Las Vegas Review-Journal, in an editorial dated September 9, 2008, states that NVPERS won’t be able to pay all promised benefits, perhaps in as little as 10 or 15 years.  Will NVPERS be able to pay the retirement benefits earned by public employees?

Yes, NVPERS has a solid financing plan in place to ensure that all benefits earned by public employees will be paid when due.  NVPERS receives contributions from all members (including retirees when they were working) and their employers to finance the cost over each employee’s entire career.  These contributions are invested over the employee’s lifetime to provide NVPERS with the ability to pay benefits earned by each employee.  Approximately 80% of the average member’s benefit is paid by these investment earnings. 

Currently, NVPERS has approximately $22 billion invested to pay for future benefits.   This equates to a funding ratio of 77%, or, in other words, 77 cents on hand today to pay for earned benefits payable now and in the future.   NVPERS has a solid funding plan at work to retire the unfunded accrued liability over time, much like a person pays a mortgage on their house over thirty years.  As explained in FAQ #9, the most significant piece of the unfunded accrued liability is being retired over a course of 27 years in a prudent and methodical manner, with equal contributions from both employers and employees.

2.         The September 9, 2008, editorial states that NVPERS is among the least stable government pension plans in the country.  Is NVPERS financially sound?

Yes, NVPERS is financially sound.  As noted above, NVPERS currently has approximately $22 billion invested to pay for future benefits and a fiscally responsible plan to retire the unfunded liability over time.  Each year, an independent actuary conducts a valuation of the Retirement System and determines the contribution rate necessary to pay benefits earned by public employees.  This actuarially required contribution rate is paid to NVPERS by the employer and employee to ensure that NVPERS remains financially sound.  As shown in the answer to FAQ #9, the contribution rates, which are set based on the actuarial valuation, have remained stable even during periods of large fluctuations in the investment markets.

In addition, the Chamber’s report states the following regarding NVPERS:  “Nevada PERS is a long-established system, funded based on actuarial studies and generally considered to be well managed and prudently administered.”  NVPERS investment costs are 59% below the average of large pension plans and PERS’ operations are efficient, maintaining costs at 21% below the industry average.

3.         The September 9, 2008 editorial states that the State of Nevada had to pay $250 million this year for payment on the unfunded accrued liability which could have gone to the state general fund.  Do local government employees and employers contribute towards paying the unfunded accrued liability?

The State of Nevada is one of 166 public employers in NVPERS, accounting for about 1/5 of the members.  Local government employees make up the remaining 4/5 of the members and contribute equally towards paying off the unfunded accrued liability.  Of the approximately $250 million as stated in the editorial, half of that amount ($125 million) is paid by the employees.  The remaining one-half is paid by all 166 public employers, from the Moapa Valley Water District to the Churchill Mosquito Abatement District, Pershing General Hospital and beyond.  Participating public employers include cities, counties, school districts, general improvement districts, hospitals, and irrigation districts. 

The total public budget is in excess of $18 billion.  The annual payment of $125 million on the unfunded liability paid by all 166 public employers is a small fraction of that amount. 

4.         The September 9, 2008 editorial states that the ratio of active workers to retirees is shrinking and will send costs higher.  How does this ratio impact the funding of retirement benefits? 

Although this ratio is very important to a system such as Social Security where today’s generation of taxpayers pays today’s generation of retirees, it is less significant in a funded program such as NVPERS where contributions are invested today to pay for the benefits of current active employees.  Funded systems use the power of investments to finance benefits and contributions are the foundation of those investments.

-on the Chamber’s Report on NVPERS

5.         The report concludes that the nature of the “Employer Pay Contribution Plan” as a shared plan, in which the employee pays half the contributions to fund retirement, has lost its meaning over time. Is it true that employees do not share the cost of paying for their retirement?

The Nevada Legislature provided that all public employees share one-half the cost of financing their retirement.  From the 1970s, until today, PERS has over 1900 employer certifications attesting that this cost-sharing mechanism was properly implemented when the contribution rates went up or down. 

 

All members of the Retirement System pay one-half the contributions to fund their own retirement benefit.  Most members participate in what is called “Employer Pay,” which is a pre-tax contribution plan designed to lower their taxable salary by the percentage paid by the employee to fund the retirement benefit. Most people are familiar with this form of pre-tax salary reduction, as it is similar to the method used to reduce taxable salary for health care premiums or voluntary retirement savings programs such as 403(B), 401(k), or 457 plans. This contribution plan provides no refund to members.

 

Approximately 18% of members participate under a contribution plan called “Employee/Employer” pay which allows the member to pay their half of the contributions into PERS with after-tax dollars.  This contribution plan shows as an after-tax deduction on the employee’s paycheck and allows the member, upon termination of public service, to receive these contributions back in the form of a refund.

 

 

6.         The report says that the PERS’ “Employer Pay” contribution rate is the highest employer contribution rate in the nation.  Should employers have to pay so much?

 

This conclusion is based on the Report’s assumption that the employee does not share equally in paying the contributions needed to fund their retirement benefit.  The “Employer Pay” rate is actually divided equally (one-half to the employee and one-half to the employer) making the employer’s portion of the rate one of the lowest in the nation, not the highest.

 

7.         Is Nevada PERS too expensive as a benefit when compared to other states in funding retirement security for public employees?

 

From the “Findings in Summary” section (page 2) of the Chamber Study:

 

       “When Social Security contributions are included in the analysis for states in which Social Security is in effect, Nevada’s total retirement contributions by both employers and employees falls among the lowest nationally.”

 

This comment is supported by Chart VII of the report which show only 6 states have a lower combined retirement contribution costs than Nevada.

8.         The report concludes that it is difficult to conceive a scenario in which the state would be placed in a worse financial position if Nevada was transitioned to a defined contribution plan—is that true?

A recent study by the National Institute on Retirement Security determined that a defined contribution plan, on average, costs 46% more to fund a retirement benefit than a defined benefit pension plan.  This additional cost in defined contribution plans is based on three components: 1. Lower investment return coupled with higher investment fees; 2. A less diversified portfolio; and 3. No longevity pooling.

On top of the additional cost of defined contribution plans to fund a secure retirement benefit, there are other costs associated with closing the current defined benefit plan both for members left in the closed plan and for employers.  This can best be demonstrated by the experience of the State of Alaska where such a conversion took place.  Contributions for members and employers left in the closed defined benefit pension plans rose to 39.76% for regular employees and 54.03% for teachers in the most recent period. 

9.         The report says paying on the unfunded liability of the System is only born by the employers.  How is the unfunded liability of the System paid? 

The unfunded liability of the System is paid as a part of the contribution rate, so employees share equally in financing the payment on the liability.  The Retirement Board adopted a payment schedule that will retire the most significant portion of liability (approximately $4 billion) in 27 years.   The payment structure used by the Retirement Board to pay the unfunded liability of the System is designed to prevent significant swings in the contribution rates.  This helps employers and employees plan for the cost of retirement.  The Board can’t remove all volatility in contribution rates, but acts to promote predictability in the rates to the benefit of the members and employers participating in the System.  Below is a chart showing the trend in the contribution rate when compared to the volatility of the stock market (as measured by the returns of the S & P 500) for the same period of time.  The Retirement Board works diligently to keep contribution rates stable and predictable even in uncertain markets.

 

 

 

 

 

 

 


10.      The ultimate retirement benefits described in the report seem extremely high.  What are the current average benefits paid by Nevada PERS to retirees?

The report attempts to compare benefits paid from Nevada PERS to benefits paid by other state retirement systems using the highest possible accumulated service credit and a salary that is higher than the average salary of members of the System participating in the regular plan.  Most regular members of Nevada PERS retire with about 20 years of service, not 30.  The average age at retirement is 60 years. PERS members do not participate in Social Security so the retirement benefit financed through Nevada PERS is often their only retirement income.  Below is chart showing the historic average benefit paid by the System.

 

 

Year

Regular

Police/Fire

1998

$1,466

$2,229

1999

$1,540

$2,333

2000

$1,626

$2,445

2001

$1,719

$2,583

2002

$1,799

$2,664

2003

$1,879

$2,862

2004

$1,961

$3,014

2005

$2,062

$3,184

2006

$2,136

$3,387

2007

$2,216

$3,549