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FROM WATCHDOGWIRE - NEVADA

Study: NV PERS Unfunded Liability Among Top 10 Largest Per Capita



$48.5 billion unfunded liability

September 17, 2013

by Michael Chamberlain

According to a new study, Nevada’s Public Employees’ Retirement System (PERS) has the 9th-highest unfunded liability per capita among government worker pension plans at $17,568 and the 10th-highest unfunded liability as a percentage of Gross State Product. According to calculations by State Budget Solutions (SBS) Nevada PERS’s $48.5 billion unfunded liability is 36% of Gross State Product.
Officially, the unfunded liability reported by PERS in its most recent Annual Report, through the 2012 fiscal year, was $11.2 billion. PERS is scheduled to release its report for the 2013 fiscal year, which ended on June 30, 2013, in November.
The reason for the massive disparity is due to the difference in the rates of return on the investments in the fund each uses in its calculations. SBS uses a figure of 3.225% annual return, while PERS calculates its unfunded liabilities based upon an 8% annual rate of return. Since the fund’s inception, it has obtained a 9.4% annualized return.
SBS uses a “market-valuation” approach to determine unfunded liabilities for state pension funds, which is based upon the 15-year Treasury bond yield, a fairly standard risk-free basis for private pension funds. This is the highest return these funds can expect to receive without risking the loss of principle. Funds may invest in riskier investments that may have higher returns. But while they can calculate their present assets and liabilities based upon actual returns they’ve already received (even if higher than a “risk-free” investment) they can’t use predictions of greater than risk-free returns to calculate future assets and liabilities.
Government pension funds, however, are allowed to use valuations based upon rules set by the Government Accounting Standards Board (GASB), which permit government pension funds to use much higher rates of return in calculating their future assets and liabilities.
According to Andrew Biggs, resident scholar at the American Enterprise Institute,

The market-valuation approach considers both the risk and the return of a pension’s investments, while conventional GASB accounting ignores risk entirely.

This is because the risk in government pension funds such as PERS is borne not by the funds themselves but by the taxpayers of the states. Under current law, if PERS were not to have sufficient funds to pay promised benefits, the state of Nevada would be obligated to force the state’s taxpayers to bail out the fund and cover the shortfall.
As Biggs stated,

A real-life example from the California Public Employees Retirement System (CalPERS) may help illustrate. Some local governments that participate in CalPERS are considering terminating their DB pensions as a way to curb costs. CalPERS recently declared that terminating plans would have their liabilities valued at a low 3.8 percent discount rate rather than the 7.75 percent rate that CalPERS ordinarily uses. The reason, CalPERS says, is once a plan is terminated the employer can no longer be required to make extra contributions, should returns on the plan’s investments fall. Under those circumstances, the plan must invest its assets more conservatively. In other words…the difference between discounting at the expected return and using the low returns dictated under market valuation is wholly a function of ignoring the value of the taxpayer guarantee to pay full pensions even if asset returns fall short. CalPERS’ own logic shows this to be the case.

This allows PERS to invest in investments with much higher returns – along with a much higher risk – factor in the higher projected returns in calculations of unfunded liabilities but ignore the higher risk that is associated with them. This incentives the fund to make riskier investments. Approximately 90% of PERS investments are in publicly-traded stocks and bonds.
In fact, while the return on Treasury bonds has declined, PERS has increased its projected rate of return three times in recent years. The rate PERS uses to calculate long-term returns on its investments has increased from 3 percentage points above inflation in 2000 to 4.5 percentage points above inflation today.
Several bills have been introduced over the years to attempt to reform PERS, most recently AB342 in the 2013 Legislature. AB342, sponsored by Republican Randy Kirner, would have introduced a hybrid pension system for government employees, with existing employees continuing in the current program and new employees being enrolled in a defined contribution plan, in which shortfalls in PERS would result in reduced benefits for beneficiaries rather than higher taxes on other Nevadans.
AB342 died without receiving a hearing in committee.
Debates over reform of PERS can at times seem confusing because of two radically different definitions of the term “risk” when discussing PERS.
When those who support the status quo use the term “risk” they are referring to the risk that PERS will be unable to pay promised benefits. Because of the taxpayer backstop the chance of this happening is virtually non-existent.
When reform advocates discuss “risk” they are referring to the chance that a taxpayer bailout of PERS may have to occur. The chance of this happening is significantly greater than zero and increases with the size of the unfunded liability.
Nevada is generally considered one of the better states regarding making the legally-required contributions to its pension plan. Some states have delayed or made smaller contributions than required during years of budget shortfalls but Nevada has continually made the necessary contributions. That hasn’t stopped the unfunded liability from growing.
Michael Chamberlain

Michael Chamberlain is the Editor of Watchdog Wire - Nevada. Please contact him at Nevada@watchdogwire.com for story ideas or to get involved in citizen journalism in Nevada.


Hmmmm this could be the cause that sinks Nevada to have a forced Nuke site brought here, against the public wishes, this could be the game plan!!!!