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Get Ready To Put On Your Helmet

by Warren Wish, NSEA-R President
To listen to an interview with Mr. Wish regarding PERS click here.

Get ready to put on your helmet and tighten your chinstrap—the political football season in Carson City will soon begin.  During the upcoming Nevada Legislature, the Public Employees’ Retirement System (PERS) will definitely be kicked around.  For conservatives intent on lowering the cost of government and attacking public employees, Nevada PERS represents one of the last remaining big ticket targets within their purview. 
Assemblyman Randy Kirner of Reno (District 26) plans to introduce Bill Draft Request (BDR) 119 in the 2013 Legislature.  This proposed law would change Nevada PERS from its current defined benefit structure into a hybrid plan with both defined benefit and defined contribution features.  BDR 119 is basically a hybrid system modeled after the public pension plan of Utah.   

The Utah hybrid pension system has been identified by the corporate-sponsored American Legislative Exchange Council (ALEC) as one of the best in the country. One of ALEC’s missions is to bring all public pension systems in-line with the privatized defined contribution 401(k) model favored by Wall Street and big corporations even though numerous studies have shown that defined contribution plans inadequately cover retirees, yet are highly profitable to banks and investment companies. In addition, a defined contribution plan shifts financial liability from the corporation to the employee.  

Trying to change Nevada PERS into a Utah styled hybrid system would be like trying to put wings on a pig in the belief it would be able to fly. Changing Nevada PERS to a hybrid pension plan would be a totally misguided effort – less pension coverage for public retirees at a far greater cost to the state. This BDR screams fiscal irresponsibility.

The fact of the matter is that the pension systems in Utah and Nevada are totally different from the ground up. Public employees in Utah are part of Social Security – both employers and employees contribute 6.2%. Public employers and employees in Nevada do not contribute into the Social Security system. Nevada public employees will have to rely upon PERS for almost all of their retirement income.  In turn, Nevada public employers benefit from not having the extra expense of Social Security. Yet, Nevada public service retirees will be penalized for receiving a public pension and earning Social Security benefits under the government pension offset laws (GPO/WEP). 
Utah gives public employees a choice between a hybrid plan (combined defined benefit and defined contribution) or enrolling in a 100% defined contribution 401(k) plan.  The defined benefit component of the Utah public pension system is totally paid by the employer.  Employers contribute 10% of an employee’s salary into the pension plan.  For the year 2012-13, the contribution rate in Utah is 8.4%.   The difference between 10% and the pension contribution rate (8.41%) is contributed to the employee’s 401 (k) (1.59%).  If the contribution rate ever exceeds 10% as determined by an actuarial study, the employee must pay the additional amount above 10%. The defined benefit part of the Utah plan is based on the average of an employee’s highest five years, a 1.5% multiplier for each year of service, and a cost-of-living adjustment up to 2.5%. 

In contrast, the Nevada defined benefit plan is based on an equally shared 50/50 contribution by employers and employees. In Nevada, the contribution rate of 11.875% from both the employer and the employee (a total of 23.75%) is actuarially determined and based on a complex formula of investment return and work force demographics. Remember, 80% of Nevada’s pension comes from the return on investment; only 20% comes from principle.  This affords a benefits package based on the average of an employee’s highest three years, a 2.67% multiplier (2.5% for employees hired after July 2010) for each year of service, and a cost of living adjustment up to 5%.  This is a far more generous benefit package.

The ultimate value of a person’s public pension in Utah depends on a smaller defined benefit package, the unpredictable swings of the financial markets (the gains/losses of their 401 (k) account), and the benefits earned from Social Security. The Utah plan is more costly to fund and to manage.  A public employer in Utah contributes a total of 16.2% of an employee’s salary into the three retirement baskets. The same employer in Nevada contributes only 11.875%.  Which state has the more cost effective plan? 

Only a handful of public pension systems in the country can match Nevada PERS in total benefit package to retirees, investment return, low risk, low management costs, and cost efficiency to employers.  A change to a hybrid system would result in a huge cost increase to Nevada, especially if the defined benefit plan is closed to new employees.  On one hand, without new employees, PERS would be unable to continue its highly successful long range (40-60 year) investment strategy.  And on the other hand, contribution rates for each employer would rise each year as only older employees would still be in the system. The reason is complicated: The age of each person in the PERS system is part of the contribution rate calculation. Younger employees just starting out in their careers lower the contribution rate for all members. Without new employees entering PERS, the benefits package – guaranteed by contract law – can only be sustained by increasing the contribution rate.  That’s part of the reason the Segal Company estimated that a transition to a pension system modeled after Utah would cost Nevada employers and employees one billion dollars over the first ten year period.

To listen to an interview with Warren Wish regarding PERS click here.


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