Compound interest, it’s sometimes said, is among the most powerful forces in the universe. That’s good news for anyone saving for retirement. But it’s bad news for Nevada taxpayers, who are stuck paying for an underfunded public employee retirement system.
This month, Tina Leiss, executive officer of the Nevada Public Employees’ Retirement System, testified at the Legislature. At the end of the past fiscal year, PERS’ unfunded liability topped $20 billion. The plan is less than 76 percent funded despite strong stock market returns.
Contribution rates are scheduled to increase in July. PERS covers both state and local government employees. For regular employees, contribution rates will increase from 33.5 percent of salary to 36.75 percent. For police and firefighter employees, contribution rates will jump from 50 percent to 58.75 percent. These contributions are split equally between employees and employers.
Senate Majority Leader Nicole Cannizzaro, a Las Vegas Democrat, said the hikes are “obviously very concerning” and “unsustainable.” She worried that the increased costs could cause employees to look for work elsewhere. Governments throughout Nevada will have to pay more for the same employees. That could lead them to reduce services or seek to increase taxes.
It’s worth looking at what’s driving these increases. PERS estimates that the cost of providing the benefits currently being earned is 18.89 percent for regular employees and 32.87 percent for police and fire employees. That accounts for about half of the new contribution rates. The difference is being used to pay down that massive unfunded liability.
This means that workers are now paying more because contribution rates were too low in the past. If previous rates had been higher, PERS would have been able to earn compound interest on that extra money, and it wouldn’t have a $20 billion unfunded liability today.
The red ink is a flashing warning sign that PERS needs fiscal reform. Ms. Leiss said that some of the higher contribution rates stem from retired employees living longer. That’s a reminder of why defined benefit retirement plans for government workers should be phased out in favor of the defined contribution model more common among the private-sector employees who are forced to foot the bill for generous public-sector benefits.
If legislators are unwilling to implement such a reform — and the Democrats who control both houses in Carson City are too often more concerned about currying favor with their government union benefactors than with fiscal responsibility — they should at a minimum tweak the PERS system going forward. That could include calculating average monthly compensation over an employee’s career, not just the highest three years of salary. It could also include more reasonable retirement age requirements and more modest cost-of-living adjustments. As Ms. Leiss noted, “Our COLA structure is somewhat expensive compared to other states.”
Worrisomely, Ms. Cannizzaro asked what “levers” were available when looking at contribution rates. Those rates are exorbitantly high now because they were artificially low in the past. Today’s lawmakers need to get serious about addressing this looming fiscal train wreck.
