Pension Sustainability: Nevada

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Nevada results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/NV-Pension-Sustainability-9

Analysis of Nevada's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Nevada's pension system for teachers is 71.2 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 30 years to pay off its unfunded liabilities. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

Nevada does not commit excessive resources toward its teachers' retirement system. Local districts choose between two funding options—the Employer Pay Contribution Plan (ERPaid) and the Employee/Employer Contribution Plan (EES/ERS)—with most districts electing to participate in ERPaid. The current employer contribution to the ERPaid plan of 23.75 percent appears high. However, in place of a direct employee contribution, teachers share exactly one-half of the employer contribution rate through salary reduction or by foregoing an equivalent pay raise. Teachers and employing school districts negotiate which of the two cost-sharing mechanisms they will use in their contracts.

Within the EES/ERS, teachers and districts also share equally in the contribution, each contributing 12.25 percent. The rates for both the ERPaid and EES/ERS are reasonable rates, considering that neither districts nor teachers make additional contributions to Social Security. However, they are very close to excessive contributions.

Citation

Recommendations for Nevada

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of less than 30 years to allow more protection during financial downturns. However, Nevada should consider ways to improve its funding level without greatly increasing the contributions of school districts and teachers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Nevada indicated that the system is funded on an actuarially reserve basis with contribution rates that are calculated biennially to meet the funding policy of the Retirement Board. The Retirement Board's funding policy requires a 30-year layered closed amortization period to retire the unfunded accrued liability of the system. As of the 2010 actuarial valuation, the average funding period for the regular fund (in which teachers participate) is 25.7 years. All valuations and reports are performed in accordance with Actuarial Standards of Practice and Governmental Accounting Standards.

The state contended that all employers and employees continue to make full actuarially required contributions to meet the funding policy of the system, which is the most significant factor in measuring a pension fund's health. The system continues to work toward full financing in a measured, predictable manner designed to meet short-term fiscal issues and long-term goals. As with all defined benefit and defined contribution plans in the most recent period, funded ratios have declined. Recovery for both types of plans will be accomplished as long as commitment to financing is maintained.

Finally, Nevada contended that when compared to other state's costs for retirement income security when combined with Social Security, Nevada trends to the lower cost end of the spectrum. On a national basis, Nevada does require higher employee participation in the cost of their benefit because the employee rate is exactly matched to the employer's rate. The state noted that the comments in this section appear to be inconsistent with the comments under goal 4-G, which indicate that the savings rate equaling 12.25 percent does not meet recommended financing standards in a defined contribution plan (the mandatory employee contribution is too high in the DB plan but not high enough for a DC plan).

Last word

According to the 2010 Comprehensive Annual Financial Report, Nevada has not met its annual required contribution (ARC) based on a 30-year amortization period since 2005.  However, the state did raise the statutory contribution for 2011 to meet the 2010 ARC.

As stated in Goal 4-G, NCTQ maintains that 12.5 percent is a reasonable employee contribution rate to a pension plan for those not participating in Social Security. However, if withdrawn, the rate alone is lower than recommended for personal savings levels. If teachers were allowed to withdraw at least part of the employer contribution, their savings levels could meet or exceed the levels suggested by financial advisers for those who do not participate in Social Security. 

How we graded

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).