Nevada Retirement News

Public Employees Retirement System
Fall/Winter 2001

Each year the System publishes an annual report, which is submitted to the Governor, members of the Nevada Legislature, public employers, and employee and employer associations. The following is some of the pertinent information contained in our 2000 annual report. Any member who would like a copy of the report should contact the System.

Member/Retiree Demographics - The annual report shows interesting trends in membership and retirement data, as follows:

In 1990, the System had 4.4 active members for everyone drawing a benefit, which decreased to 3.6 in 2000. We anticipate that this trend will continue to decrease to about 3- active members per retiree in the next five years.

A comparison of active members by employer type for 1990 and 2000 is as follows:

June 30	1990	2000
State & University	13,800	17,782
School Districts	18,539	33,632
Counties	10,088	10,728
Cities	5,518	7,653
Miscellaneous	3,196	11,039
Totals	51,141	80,834

Contribution Rates - As of July 1, 2000, contribution rates for regular and police/fire members under the two contribution plans were as follows:

Contribution Rates:	7/1/02000
Employer Pay     Regular     Police/Fire	18.75% 28.50%
Employer/Employer (Matching Rates)     Regular     Police/Fire	9.75% 14.75%

Contribution rates will remain the same through June 2001 for all members regardless of contribution plan.

Investments - The System has a funding objective to provide a total rate of return which exceeds the Consumer Price Index (CPI) by 3% each year over the long-term future. Our investment objective to achieve that funding is to capture market returns for each asset class. For domestic common stocks, it is the return of the S & P 500; for U.S. bonds, the Lehman Aggregate; and for real estate, the National Council of Real Estate Investment Fiduciaries (NCREIF) index. International stocks are measured against the Morgan Stanley Europe, Australia, Far East Index, non-U.S. Bonds against the Salomon Bros. Non-Dollar Government Bond Index. Total return for the year was 7.6%.

Financial - During the 2000 fiscal year, the total fund balance changed as follows:

Legislation The Nevada Legislature does not convene in even numbered years. Therefore, no year 2000 legislation was enacted. The System is involved however, in two interim legislative studies. Additionally, certain draft elements of PERS' 2001 legislative program have been reviewed and approved by the Retirement Board.

Assembly Bill 74 of the 1999 legislature is an interim study directed at retiree reemployment. It requires the Board to conduct a study of the effect on the Retirement System of the employment of retirees by participating public employers. The study is likely to recommend a revision to PERS' reemployment law for certain reemployed retirees given a critical labor shortage exists for many public sector occupations and that current retirees are one resource that may help alleviate the problem.

Assembly Bill 698 is another interim legislative study from the 1999 Nevada legislature. It directs a subcommittee of the Legislative Commission to perform a study of the Judges' Retirement Plan. As a result of the study, a bill draft request has been submitted to fund the Judges' Retirement Plan on an actuarial reserve basis. The bill draft also includes language to change administration of the plan from the Administrative Office of the Courts to PERS.

Certain housekeeping items have been approved by the Board for the 2001 Nevada legislature. These include a revision to the laws governing penalty assessment for delinquent payment of contributions by public employers and clarification of purchase of service eligibility for certain members. Any fiscal legislation to be introduced by the Board for the 2001 Nevada legislature is pending actuarial cost estimates.

Technology Improvements One stage remains to be completed in our technology replacement project entitled C*A*R*S*O*N (Computer Automated Retirement System of Nevada). Already successfully implemented are a new financial accounting system, local area network, comprehensive website and membership system. Benefits, as the final component, is scheduled for implementation in early 2001.

Additional technology initiatives include conversion of PERS' member files from hard copy to optical imaging. This initiative is divided into three strategic components; 1% conversion for methodolgy development; 9% conversion for validation and methodology improvement and 90% conversion completing the project. Project management is provided by PERS' staff with quality assurance provided by the vendor and a separate quality assurance consultant. The project is bid at a per page cost and carries the requirement for a performance bond and 15% holdback on all costs.

Strategic Planning Strategic and tactical planning are key to the successful management of the Retirement System. They must address both external and internal elements ranging from federal legislative efforts to staffing levels necessary to meet the service demands of our members and beneficiaries. One issue currently under review is that of pension portability and preservation.

In 1999, The Segal Company (PERS' actuarial and benefits consulting firm) began a study of pension portability and benefits preservation as part of the Retirement System's overall consideration of benefit design. The central focus of this exercise addresses the ability of short-term employees to retain more control over their retirement benefits and to preserve the value of those benefits.

The need to study retirement benefit portability and preservation issues arises out of concerns nationwide that traditional defined benefit systems do not adequately protect the value of accrued benefits for many plan members. In fact, a recent report by the National Conference of State Legislatures titled "Pensions and Retirement Plan Issues in 1999 State Legislatures" states that the major themes for state pension legislation in 1999 were issues of pension portability and preservation.

Benefit portability is defined as the features of a retirement plan allowing participants to move all or a portion of the value of their benefits in the plan. Benefit preservation is defined as the features of a retirement plan that act to maintain the value of a participant's benefits for use during retirement.

Potential preservation enhancement features include decreasing vesting requirements and indexing deferred vested benefits to account for inflation. Common portability enhancements include providing for lump sum payments at deferred, early, or normal retirement eligibility, adding a cash balance component to the defined benefit plan, and refunding employer contributions.

In other strategic planning issues, PERS continues to assess staffing needs in both Las Vegas and in our central office. Additional staff will be required to meet increasing demand in both the Las Vegas metropolitan area and in membership and benefit processing.   

The Retirement Board adopted a legislative agenda at its November 2000 board meeting focusing on the System's strategic plan in enhancing benefit portability and preservation. The Board is seeking the following three benefit enhancements:

Three-Year Vesting

Three-year vesting follows the national trend towards earlier vesting in both the private and public sectors and provides an opportunity for the Retirement System to add value to the retirement plan with little or no additional cost.

• Three year vesting exerts little, if any, actuarial impact on the plan.

• Although minimum vesting standards under the Employees' Retirement Income Security Act (ERISA) do not apply to public sector pension plans, private sector plans must provide 100% vesting with 5 years of service or graded vesting after 3 years.

• Three-year vesting enhances benefit preservation by creating a vested interest for those members with 3-5 years of service.

Indexing of Deferred Vested Benefits

The Retirement Board is proposing an inflation hedge on vested benefits of 2% per year for members who leave the plan prior to reaching retirement age. This benefit is referred to as indexing deferred vested benefits.

The following is an example of how indexing would work:

A member, age 40 terminates employment with 10 years of service and an average compensation of $3000 per month. Under current law, the expected benefit under the unmodified plan is as follows:

10 years x 2.5 % x $3000 = $750 per month beginning at age 60.

The proposal to index the benefit at 2% annually for the period of deferral (in this example for 20 years) from age 40 to age 60 would be as follows:

1.02²⁰ = 1.4859

$750 x 1.4859 = $1,114.43, as the new unmodified benefit

This calculation works to preserve the purchasing power of the benefit, when inflation over that period would otherwise erode the value.

Pre-Retirement Death Benefit for Unmarried Members

Under this proposal a named beneficiary of a deceased single member of the System, would be entitled to the same benefit as the surviving spouse of a married member. This benefit is in addition to benefits already available to dependent children within the statute.

• Pre-retirement death benefits for non-spouses of single members recognizes the significant investment of single participants who die prior to retirement.

• Pre-retirement death benefits for non-spouses of single participants is a form of benefit preservation, enhancing equity among participants without regard to marital status.

Assembly Bill 74 of the 1999 legislative session required the Retirement System to conduct a study of retiree reemployment. As a result of this study, including a national survey of public retirement systems as well as input from Nevada public employer and employee groups, the Retirement Board is seeking modification to current reemployment laws as follows:

• A retired public employee shall be exempt from PERS' reemployment provisions provided;

• At the time of reemployment by a participating public employer he would be eligible to receive an unreduced benefit; and

• He is filling a position in an occupation deemed to be experiencing a critical labor shortage.

In order for a position to be designated as experiencing a critical labor shortage, a designating authority must consider: turnover history, the number of openings versus qualified candidates, length of vacancy, and the history of out-of-state recruitment.

For the State of Nevada, the State Board of Examiners will designate the existence of "critical labor shortage" occupations for state government. The Board of Regents will designate the existence of a "critical labor shortage" for all University and Community College occupations. The governing body of a local government employer (such as a city council, county commission, hospital board, etc.) will designate "critical labor shortage" occupations within that particular public employer. The State Board of Education will determine school district "critical labor shortage" occupations.

This reemployment exemption shall sunset June 30, 2005 and shall be reenacted July 1, 2005 providing a funding policy consistent with actual experience for the period July 1, 2001 through June 30, 2004 is in place. Based upon advice of the System's actuary, this exemption does not require advance funding provided the actual experience is reviewed and costs associated with this proposal are recognized for continuation at the 2005 Nevada legislative session.

At their Annual Investment Planning Seminar, the Retirement Board reviewed the PERS' investment assumptions and asset allocation, and subsequently implemented a number of program enhancements.

First, the Board reviewed the System's inflation and capital market assumptions. After discussions with PERS' staff, investment consultant, investment managers, and actuarial firm, they determined the long-term inflation assumption should be lowered to 4.5%. This adjustment acknowledges the lower price inflation environment that is expected in the future.

They also revised expectations for long-term capital market risk and returns. The changes are consistent with the Board's long-term view.

	Prior Expectation	New Expectation
Stocks (Domestic & Int'l)	10.5%	10.0%
Bonds (Domestic & Int'l)	8.0	7.0
Real Estate (Domestic)	9.5	9.0

In order to ensure achievement of our actuarial objectives given the decline in market expectations, the Board explored alternative asset mixes. The result was a decision to increase the exposure in domestic and international stocks from 40% to 45%, with the assets withdrawn from U. S. bonds. The new mix is "efficient", meaning it maximizes return for the level of risk accepted. The resulting allocation is as follows:

Nevada PERS' asset mix remains conservative as compared to a sampling of other public funds. Callan Associates' Plan Sponsor Database reports the average pension fund's equity allocation to be 59% at September 30, 2000. The difference in equity exposure is generally related to a fund's actuarial objectives and risk sensitivity.

The goal of the investment program is to fund the System's liabilities by generating a net annual return of 8% over the long term. The program changes made by the Board support that goal.

The majority of the asset allocation shift was implemented during the months of September through November. The transition was designed to take place over a period of time to minimize the impact of market fluctuations. As was evident in the daily news, the equity market suffered a general decline over this time period. While the Board does not attempt to market time, this market environment was beneficial to the portfolio, as we sold into price strength in the bond markets, and bought equities as they were weakening.

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