Report: Change public employee retirement system would mean big upfront costs

CARSON CITY - The panel that oversees Nevada's public employee retirement system was told today it would cost about $1.2 billion over the next two years to change from the current defined benefit plan to a defined contribution plan for new state and local government workers.

The increased costs would come about as the Public Employees' Retirement System moved to fully fund the existing plan for current state workers and retirees who would remain in the defined benefit plan.

The increased funding would have to continue over the next several years, adding costs to state and local government budgets. While the cost of the current retirement plan is shared between workers and their government employers, Dana Bilyeu, executive officer of PERS, said employers might end up having to bear the entire increased cost.

"Probably the entire cost would be borne by the employer because the employees are going to say, 'hey, wait a minute, you've unilaterally made a decision to change the financing here and I'm now penalized because of that'," she said.

The report by the Segal Group Inc., the PERS actuary, was prepared for the retirement board at no additional charge. It was accepted by the board and will be forwarded to the Legislature and Gov.-elect Brian Sandoval for their consideration at the 2011 legislative session. The board took no position on the report or the suggestion to switch to a defined contribution plan.

Sandoval and some lawmakers have advocated a change to a defined contribution plan for new hires as a way of containing a long-term unfunded liability for the current defined benefit plan, which hit $10 billion as of June 30.

A change from a "defined benefit" plan where retirement payments are guaranteed based on salary and years worked, to a "defined contribution plan" where public employers contribute to employee retirement without any guarantees of pension amounts upon retirement, is being pushed for public employee retirement plans nationwide.

Such a change would eliminate the unfunded liability for future hires. There is a current legal prohibition for changing the plan for workers currently in the system.

Advocates for the current system say Nevada's plan is well managed, is being funded appropriately and will be fully funded over time.

The unfunded liability number won't be recalculated until next year, but Bilyeu said today the PERS investment portfolio is up 13.6 percent since July 1, and assets total about $23.7 billion.

Members of the PERS board heard today that making the switch would result in significant upfront costs to the state and local governments as the current plan would be closed to new members and it would have to be fully funded over a shorter period of time.

Bilyeu said the change could be compared to switching from a 30-year mortgage on a home to a 15-year payoff, resulting in higher payments. In the case of PERS, the amortization schedule would shrink from the current 25.5 years to an average of about 10 years, she said.

The Segal Group report cites a number of advantages and disadvantages of defined contribution plans. Defined contribution plans would likely require employees to manage their own investments, and they are frequently drawn down by workers before retirement. They do not include cost-of-living increases to maintain purchasing power.

For government entities and taxpayers, however, eliminating any potential future unfunded liability is a major plus of such plans.

But there is a cost to making such a change. Contribution rates, which now are shared by employers and employees, are set to increase over the next two fiscal years to keep the current defined benefit plan financially healthy. Rates will go up to 23.75 percent from 21.5 percent now for regular employees.

But to fund the plan more quickly, the rate would have to increase to 34 percent instead, according to the Segal report.

For police and firefighters, who are analyzed separately, the increase would go from the proposed 40 percent contribution rate over the next two years to 52 percent.

The cost of these increases would total $1.2 billion for the coming two years, and would continue until the closed defined benefit plan was fully funded.

Carole Vilardo, president of the Nevada Taxpayer's Association, has questioned whether state and local governments can afford to make the changeover in the next legislative session because of the costs and the current financial problems facing the state. While advocating for the switch, Vilardo said in an interview on Nevada NewsMakers last week it might have to wait four years.