PERS Meeting Summary

The PERS Board met this month. Here is an excellent and well written summary by Warren Wish, Retired and former PERS trustee:

At the May PERS trustee meeting several very important issues were discussed:

 1. PERS performance for the first three quarters (9 months) was disappointing. Though the 2nd quarter was one of the best in PERS’ history, the European crisis (Greece, Spain, Italy) severely impacted the 3rd quarter and the overall 9 month performance. For the first three quarters, PERS’ U.S. stocks portfolio rose +8.1% and real estate holdings +8.3%. Over the same time period, PERS International stocks declined -7.0% and international bonds rose only .2%. If the international markets don’t change over the next two months (or get worse), PERS will fall short of its 8% investment goal. To date for the 2012 fiscal year, PERS has had an absolute performance of +1.4%. In relative terms, this level of performance places NV PERS in the top 13% of all pension systems. Critics (Las Vegas Review Journal) will probably scream and hammer PERS for not making 8%. Of course, the press will fail to mention that PERS continues to be one of best pension systems in the country. It will be critical for PERS advocates to remind the public that since Jan. 2010 to May 2012, PERS has had an investment return (cummulative) of +36%. As a long term investor, PERS continues to do very well, but there will always be short periods of market decline that affects short term performance.

2. Recently, the PERS executive staff (Dana Bilyeu, Tina Leiss) were called to the Governor’s office to meet with Heidi Gansert, Governor’s Chief of Staff and Judy Osgood, Policy Analyst. PERS was told that the Governor is taking away one of the two Bill Draft Request (BDRs) PERS has always had to directly bring issues directly to the Legislature. In the past, PERS has used one BDR to make technical changes to the System in response to legal and IRS changes. The second BDR has been used by PERS to make improvements to the System. Now, PERS will have to go to a friendly legislator and ask them to introduce a BDR on PERS’ behalf.

3. The BDR issues is of particular concern because PERS was thinking of going to the Legislature with a bill to create an executive salary funding formula.  PERS has realized that it will be impossible to replace Investment Officer Ken Lambert with a person with the necessary skills at the current State salary schedule.  PERS commissed a study of executive compensation for pension investment officers in the western states. Nevada ranked in the bottom 25% of this study with an investment officer earning $125,000 after 17 years of service. Salaries for investment officers ranged from $500,000 a year in Idaho (smaller than Nev. PERS) to over $1 million a year in Texas (a larger system). PERS is now planning to change its leadership structure in response to this situation. Instead of a chief investment officer, PERS plans to have an investment analyst (far less qualified) and use the services of investment consultants when necessary. These would be private consultants and not salaried positions. Unfortunately, the net effect to PERS would be increased costs, but consultants do not have to be approved by the Interium Finance Committe.

4. The Governor continues to believe that PERS no longer meets the needs of Nevada’s public employers or public employees.  In his opinion, PERS is too expensive and far too disconnected from the current economic realities of Nevada. The Governor intends to introduce legislation to change PERS into a hybrid system (part defined benefit and part defined contribution). It would seem that the Governor believes that he can sell the Legislature the idea that by reducing the state contribution to 8% (from the current 11.75%) for new employees, public employers will be better able to balance their budgets. Plus, changing the employee portion to a DC plan, will shift the investment responsibility to the individual and give employees more personal freedom to decide how much to take in salary and how much to set aside for retirement. The Governor believes that giving current employees the option of changing into the DC plan could possible give employees an immediate 8-10% salary increase. The Governor believes that this option would be very popular to both new employees and current employees. The Governor thinks that people cannot afford to set money aside for retirement to be used twenty years down the road when they are struggling to keep their homes and buy groceries. The message will be employees need the ability to deal with their current financial needs. The Governor believes that this will be political very attractive – lower public employer costs while giving all public employees the option of an immediate salary raise.  It remains to be seen how the Governor proposes to finance this pension change.  In a 2011 independent actuarial study commissioned by PERS, the actuary estimated the cost of switching from a defined benefit plan to a hybrid plan would cost upwards of $10 billion over a ten year period.  This cost reflects the need to pay-down the unfunded liability during the conversion period.  Other states that have made the change were in a more secure financial and economic condition than Nevada.

 4. On the horizon is another potential crisis. At the PERS meeting, I had a private conversation with the PERS actuary, Brad Ramirez from the Segal Company. He told me that the Government Accounting Standards Board (GASB) has been working on pension accounting changes for both corporate and public pension systems. These changes will be coming out in 2013 for implementation in 2014. One change in particular has him very concerned. GASB has decided to change how pension systems account for their unfunded liabilities. Currently, PERS uses a small portion of the contribution rate to pay down the unfunded liability statewide over the next 24 years. In the future, GASB will require pension systems to shift the financial responsibility of the unfunded liability from the pension system to the balance sheet of each separate public employer. In the case of NV PERS this would mean that all of the 170 state, county, school district and city employers including police and fire, would be responsible for a proportional part of this liability. Each public employer would have to show this unfunded liability on their books. This would place an additional burden when it comes to balancing public budgets. When this news comes out, there will be an uproar. Immediately, public employers will be saddled with a liability and no additional sources of funding. This could potentially give PERS critics major ammunition to radically change PERS. Can you imagine the RJ headline, “PERS puts public employers in crisis”.

Warren Wish, Retired

Former PERS trustee

For meeting information: http://www.nvpers.org/public/whatsNew/currentInfo.jsp