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PERS Update May 2014


Submitted by: Warren Wish, NSEA-Retired

1. To date, PERS investments have earned 14.3% through the 3rd quarter of fiscal year 2014. This represents an increase of nearly four billion dollars. With only five weeks to go before the end of the fiscal year on June 30, there would have to be a major fiscal correction (10% drop in the stock market) for PERS to fall below its investment of 8% for the year. Given the bull market has been going strong for almost six years; a correction is expected at some time in the future. Right now as the stock market rises it is defying conventional wisdom. One interesting investment note: every $1.00 PERS invested in 1984 has grown to $15 in the system today. During the past five years (during the core years of the recession) PERS earned 14.4%. This is nearly a record high for a five year period. Of course, markets always correct and PERS has begun to anticipate adapting to a future period of low returns.

2. PERS made a major investment change by switching the remaining 25% of its international investments from active to passive index funds. For the past five years, PERS has been 75% in the international index; now it will be 100%. This is both a huge savings in management costs and a realization that active managers were not capable of beating the total market index.

3. Several months ago, PERS commissioned the Segal actuarial firm to study the financial impact of structural changes to the defined benefit system. This was done in anticipation of possible “reform” legislation expected to be introduced in the 2015 Nevada Legislature. During the past four years, there hasn’t been any political effort in Washington to force all public employees to join the Social Security system. Remember this was a serious proposal of the Bush Administration and more recently of several bipartisan deficit reduction committees. The Simpson-Bowles committee recommended requiring all new public employees after 2020 to join Social Security. It was estimated that this would reduce the national debt by 8%. Critics of PERS don’t understand that Social Security is a pay-as-you-go poverty prevention program designed to keep families together during crisis. Social Security was never designed to be a retirement program, though unfortunately a significant majority of older Americans receive more than half their income from this source. At this time, 25% of public employees (10-15 million people) are not covered by Social Security. Likewise, the experts acknowledge that it would be impossible to change Social Security to a retirement system with a diversified investment strategy. Since its inception Social Security has only invested in a special category of guaranteed low return federal government bonds that cannot be sold but is available for Congressional use. The major advantage of forcing new public employees into Social Security would be the immediate infusion of revenue – not for investing but for paying current benefits.

A number of states have created hybrid retirement systems that incorporate Social Security, defined contribution (DC), and defined benefit features. There are three possible ways this could be done. First, the PERS system could be closed to new employees and these people would go into the hybrid system. Once the current PERS system is closed, public employers and employees in the old system would see a 14% increase to the contribution rates. This is caused by the state still being responsible for the unfunded liability and a shrinking pool of members to spread the cost. Secondly, for those in the hybrid system 30-40% of their retirement would come from Social Security, and the remaining portion would be from PERS and DC investments. Hybrid plans are not a cost savings to the state – employers are making contributions to Social Security (6%), PERS (8%), and a matching DC plan. Conservative lawmakers are responding to the rhetoric of the far right and not the details of reform being very complicated and costly.

4. The PERS Board also received a national administration report comparing PERS with other large fund retirement systems. This is a cost of doing business study. Once again, Nevada PERS compared very favorably as having very low administration costs while providing an average range of services.

5. This past month PERS lost two senior professionals to headhunting firms representing private sector companies. PERS is no match for companies able to offer a higher standard of compensation. One was a senior accountant and the other held a top level technology position – not surprisingly recruited by Apple. It continues to be abundantly clear that PERS is at a serious disadvantage trying to recruit and retain financial professions for public service. It remains to be seen whether this trend will have long term consequences.

6. Lastly, PERS has decided to request legislative funding for an in-house attorney. This past year, PERS has seen a huge increase in lawsuits and being named to legal actions. In most cases, PERS is named as a minor party to the suit, but nevertheless is forced to defend the system. For years, PERS has been represented by the Attorney General’s legal staff, but now in many cases there are issues of conflict of interest.

 

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