The Threadbare Purse of PERS
by Doug French
by Doug French
In a recent letter to the editor published in the Las Vegas Review-Journal, police officer Ruben E. Hood makes the claim that the Nevada Public Employee Retirement System "is one of the healthiest, most financially sound retirement systems in the country." He went on to write that because of laws keeping the pension plan from being looted, there is no chance of "any ‘underfunding' of pension plans that would fall on the shoulders of the taxpayers."
Officer Hood is no doubt just parroting what he has been told. The Nevada PERS website indicates that the "System maintains a strong financial standing with over $14 billion in assets." The website doesn't mention the system's liabilities, only that it has "87,500 active members and over 27,000 benefit recipients."
But according to the analysis completed by Wilshire Research and published in the 2004 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocation, Nevada PERS is seriously underfunded — as are most state pension plans. Wilshire reports; "Of the 64 state retirement systems which provided valuation data for fiscal year 2003, 97 percent are now underfunded, up from 94 percent in 2002."
In fact, only two states have pension plans with more assets than liabilities: Florida and North Carolina. In 2002, nine states had pension assets that exceeded liabilities. This is a drastic change from 2000, when only 31 percent of the state pension systems were underfunded.
As of June 30, 2003, Nevada PERS assets had a market value of $14 billion, but actuarial liabilities of $19.5 billion. To generate a meaningful index allowing comparisons between states, Wilshire then divided each state's unfunded or overfunded liabilities by the dollar amount of the state budget. A value of 100 percent would mean a state's pension plan is underwater by the full amount of the state's annual budget. Nevada PERS percentage is a whopping 269 percent — a slight deterioration from 2002 when the percentage was 267 percent.
No other state pension system can match the magnitude of Nevada PERS underfunding in relation to its state budget.
Nevada's asset to liability ratio of 72 percent earned it a rank of 104th out of 123 pension systems examined.
So, Officer Hood, is Nevada PERS really "one of the healthiest, most financially sound retirement systems in the country?"
Unfortunately, the deterioration of all government pension plans, including Nevada's, will likely continue. Pension managers assume that their plans will earn eight percent per year on system assets. How realistic is that?
On June 30, 2003, Nevada PERS had 43.6 percent of its assets in stocks, 48.3 percent in U.S. Bonds and 7.2 percent in real estate. Assuming the bond portfolio earns six percent, the stock and real estate portfolios must earn ten percent to generate the eight percent assumed by PERS pension managers. As investment author John Maudlin wrote in his book Bull's Eye Investing, a 10 percent stock market return "would mean that the market will double in the next seven years: Dow 20,000, here we come!"
That's not likely, Mauldin points out: "Since 1871, real stock prices have grown at 2.48 percent." Thus, as more government employees enter the system and liabilities increase, the assets to pay for the retirement of those employees will not be available because the assets likely won't grow at the rate projected.
So, ultimately the burden will fall to the taxpayers, and PERS management knows it. In August of 2002, fresh from the stock market crash, George Pyne, then executive director of Nevada PERS told The Wall Street Journal that the market crash may require taxpayers to increase their "contributions" to the system to keep it actuarially sound.
Particularly galling is that government employees for years have evaded increasing their contributions. As Rick Henderson wrote in a January 2003 R-J article, "the lion's share of public employees in Nevada, from Clark County teachers to police officers and firefighters and county workers, don't pay a dime out of their own pockets to PERS."
PERS is a "defined-benefit" pension plan; law sets the monthly benefit. Conversely, nearly all private sector employees have "defined-contribution" plans, such as IRAs and 401ks. Thus, the same taxpayers who currently foot the bill for government workers' golden years must also be both diligent savers and savvy investors to provide for the retirement of both themselves and their government-employee neighbors.
A monstrous burden indeed, that will likely keep private sector employees on the job until they drop — while PERS employees retire early and enjoy the good life.
September 8, 2004
Doug French [send him mail] is executive vice president of a Nevada bank and a policy fellow of the Nevada Policy Research Institute.
Copyright © 2004 LewRockwell.com