Time for pension changes

Analysis of PERS by NPRI’s Andrew Biggs: http://tinyurl.com/za5msoc

Progressives love to attack private business for perceived market failures, demanding more openness and transparency in dealings with the public. They complain that corporations design complex financial instruments, subsidiary holding companies, offshore accounts, and other secret devices to hide their accountability.

A corporation’s first duty is to its stockholders, and so these veils are somewhat understandable. Government’s first duty is to the public, but progressives are eerily silent about the deceptions that governments and public agencies use to hide their real spending, assets and debts from the eyes of the taxpayers.

The Nevada Public Employees Retirement System (PERS) has fought in the courts three times to hide its retirees records from public scrutiny. It lost a suit bought by the Reno Gazette-Journal for these records in 2011, and then the appeal to the Nevada Supreme Court in 2013. Then in 2015 they went to court and lost again, this time to the libertarian think tank, the Nevada Policy Research Institute. PERS is appealing that decision. The public’s right to know the facts about public pensions in Nevada is tied up in court by a secretive PERS.

Retirement plans are funded to about 30 percent by contributions but then are supposed to cover their liabilities by the interest on their investments. The gold standard is to get 8 percent per year return on investment (ROI). Over the last 10 years, state and local pension funds have averaged less than 7 percent. Some states have averaged much less. This means that their debt liabilities are dangerously high.

The safest way to insure the magical 8 percent-a-year return used to be to invest in 30-year government bonds. However, since the 1990s, inflation and artificially low interest rates caused by the Federal Reserve’s money creation, like Quantitative Easing 1 and 2, has resulted in expensive bonds with very low yields. Inflation helped the tech boom in the go-go ’90s but then the 2007 bust turned lights out on the party. The response of the government was more inflation because that’s how government rolls. The one percent decided to bail out the financial system instead of allowing a natural sharp downturn with some big names going under followed by a robust recovery. The bailouts and fed money pumping resulted in a recession that did not clear out much financial deadwood except for foreclosures on average homeowners. The Obama recovery is the slowest, most sluggish of any in American history.

To compensate for the declining Treasury bond returns, pension funds have purchased high yield but riskier investments. Nevada’s pension fund liability is currently ranked 26th in the country.

The riskier, more volatile assets in PERS means that the portfolio value fluctuates from year to year. Accountants take a five year average, but the uncertainty over the actual real time valuation instead of actuarial value of PERS means the target ROI should be 8.6 percent instead of 8 percent, as a hedge against uncertainty. Since the assets are only yielding about 6.5 percent, this increases the gap between what PERS claims to own and the market reality.

Nevada may not be the worst state, but it is in bad shape. California is in horrible shape. Too many retired public employees in the Golden State are pulling down outrageous six figure pensions. (Then they move to Nevada and vote Democratic.)

Nevada taxpayers need to support pension reform in this legislature. The ideal would be to convert the pension system from defined benefits to defined contributions like most ordinary citizens have. With Democratic control of the legislature, pension reform may be an uphill battle. But it is a battle that the 2017 Legislature has to fight.