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A new report once again sheds light on public pension debt and its potential impact on states’ taxpayers and business climate.
The Competitive Enterprise Institute (CEI) recently published a comprehensive study on state pensions, focused on the differences between the health of these plans using official figures and using “fair market value” calculations employed by private pensions and other government entities.
By some measures used in the CEI study, Nevada’s Public Employee Retirement System (NV PERS) rates in the middle of the pack among states, while in others the health of NV PERS appears to be among the direst.
A composite of the various studies CEI cites ranking states from worst to best has Nevada at 28th. However, in the study using the most recent data (2013), Nevada has the 10th-highest unfunded liability as a percentage of state GDP, 36.3%. Generally, among these studies the more recent the data used, the worse NV PERS looks.
According to NV PERS 2013 Financial Report, despite above-average investment gains the funded ratio of NV PERS fell to 69.3% at the end of FY 2013. This is its lowest level in at least twenty years and 1.7 percentage points less than the 71.0% funded ratio at the end of the previous year.
While returns for NV PERS over the last year and three years (12.4% and 11.9%, respectively) have exceeded the necessary investment returns, that still has not been enough to make up for lower returns in the years during the recession. The five-year and ten-year return figures of 5.6% and 6.9%, respectively, are still short of the 8% return necessary for the fund to meet its liabilities without a taxpayer bailout.
NV PERS uses a discount rate of 8% to calculate the value of assets and liabilities in the plan. This means that the fund must average 8% return forever in order to pay promised benefits without a taxpayer bailout.
The CEI report compares the unfunded liabilities of states using their official calculations with those using what it terms a “fair market value” approach, a calculation it states “is the standard for private corporations in the United States and almost all foreign government, and is used by the Congressional Budget Office and the Bureau of Economic Analysis as well.”
By comparison, while the official unfunded liability for NV PERS as of June 30, 2013 was $12.7 billion, State Budget Solutions, using a fair market value approach, calculated the unfunded liability at $48.5 billion.
The CEI report notes that the use of high discount rates by state pensions, such as the 8% used by NV PERS, has potential consequences for taxpayers. It both hides the real debts of the plans and encourages them to put assets in risky investments in order to achieve the required returns.
Even using such high discount rates, state and local government data have shown public pension funding shortfalls. But those shortfalls become much larger in revised estimates using lower discount rates. Put simply, many public pension plans are underfunded even under their own accounting. Fair-market-value adjustments show the underfunding is even more severe.
Pension liabilities could have disastrous effects on states’ economies, according to CEI.
If public pension programs are severely underfunded, tax rates may need to be raised and government services curtailed in order to meet future payment obligations. Therefore, private businesses choosing where to locate, and individuals choosing where to live and work, are wise to consider not only the current policy climate of prospective states, but also the risk of policy changes made necessary by looming budgetary concerns like the need to increase funding of public pensions.
Tags: Competitive Enterprise Institute, Nevada Public Employee Retirement System, NV PERS, pensions, PERS
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