Report: PERS liabilities worse than thought
The Nevada Policy Research Institute has issued a report charging that Nevada’s public employee retirement system has four times as much unfunded liability as system officials claim.
The difference, according to author Andrew Biggs of the American Enterprise Institute, is how long-term liabilities are calculated. According to his analysis, when unfunded liabilities of the Public Employee Retirement System are calculated using a market-based valuation, the plan’s overall funding ratio falls from 70.5 percent to just 34 percent and its total liabilities increase from $10 billion to $41 billion.
He says that method of valuation is the choice of most economists but not the method used by PERS.
At the same time, he called for the plan to be converted from a defined-benefit program to a defined-contribution plan.
“While both methods are valid for what they do, the market-based approach is not a good fit for government because is really focused on termination liability,” said PERS Director Dana Bilyeu, referring to the fact that businesses go out of business. State government, she said, is “a perpetual entity” that won’t go out of business.
She said that plan design is in the hands of politicians, not her staff, and that their role is to provide perspective on plan designs and what features fit or don’t fit the mission of attracting and retaining quality employees and providing them with income security in retirement.
Changing from an actuarial evaluation system to market-based would create “huge amounts of volatility” for the system because premium rates would be tied to current interest rates on an annual basis. In the current market, she said, that would mean big increases to members.
“Our goal is to try do the most predictable approach long-term,” she said.
PERS bases its calculations on the actuarial value of its portfolio – currently about $25 billion. Its projected total liabilities are about $35 billion – a $10 billion gap.
She said that Biggs is a respected economist but that his primary objections are with the rules set by the Governmental Accounting Standards Board. The accounting method used by PERS is consistent with those rules.
Biggs said in his report that those rules hide the true liability of the system because of the risk in maintaining at least an 8 percent return on investment. He said the market-based method calculates liability of the system based on a much lower interest earnings rate.
Bilyeu pointed out that PERS has actually exceeded that goal, averaging a 9.5 percent return on investment over the past 28 years.
“We try not to react to short-term volatility in the markets,” she said.
She said the other key issue in Biggs’ analysis is the call to convert PERS to a defined contribution rather than defined benefit plan. She said that too is a political decision, not one for her staff to make, but that it would have a huge cost impact on both members and the state – $1 billion a year for the next 10 years.
“For us, a $10 billion price tag over a 10-year period is a lot of money,” she said. “It would basically double the contributions.”
The reason is that the defined benefit plan can’t be taken away from current PERS members, but putting all new members on the defined contribution program would result in making their contributions be unavailable to pay benefits in the existing plan. The state and members would have to make up the difference.
Contributions are split between the governmental entity and the member, each paying half of whatever the contribution rate is.
PERS has members from all governmental entities in Nevada, state and local.