Pension Sustainability: Nevada

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

2010 CAFR for the Public Employees' Retirement System of Nevada

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.