Some institutions are “too big to fail” (TBTF). TBTF gained notoriety during the 2008 global economic crisis, describing financial institutions so deeply interconnected with the American economy that their default would have detrimental consequences for the US and the international financial system. Disregarding years of mismanagement and fiscal irresponsibility, the US government spent billions of tax dollars to avoid their collapse. Nevada’s Public Employees’ Retirement System (PERS) is heading towards its own TBTF moment.
PERS is Hiding Financial Risks
PERS works similar to a 401(k). Government employees and agencies pay into the fund; these contributions are then channeled into various investments to increase in value over time. Upon retirement, government employees receive a guaranteed payout from the fund, a so-called defined benefit pension. The amount of this pension is based on years served and most recent pay grade. Nevada must meet its PERS obligations every fiscal year, regardless of the amount available. But how does the fund ensure it has sufficient reserves available?
PERS uses accounting rules developed by the Governmental Accounting Standards Board (GASB). GASB makes debt and upcoming payments look smaller than they actually are, exposing the fund to the risk of default. At the end of its 2023 fiscal year, PERS held $58.3 billion in assets. It reported $76.6 in liabilities, meaning its funding ratio was 76.2%. This is problematic, as it means that the fund operates on a $18.3 billion deficit to cover its liabilities.
PERS’ returns on investment are supposed to make up for any shortfall in funding but are insufficient to cover all of PERS’ running costs. The fund is like a leaky swimming pool. Water is draining through a huge crack while the pool attendant is trying to refill it with a garden hose. Even if the hose runs 24/7, the pool will never reach the level it needs until its crack is repaired.
This deficit is created in part because GASB does not consider factors such as market volatility and salary increase over time, painting a misleading picture of the fund’s actual financial health. This lack of clarity delays the necessary reform of the fund and exposes Nevada taxpayers to unnecessary financial risk. GASB is like building a bridge using a blueprint that assumes calm waters and perfect weather all the time.
On the other hand, many private sector companies follow the more rigorous Financial Accounting Standards Board (FASB) standard. FASB has a conservative approach to estimating liabilities and considers market fluctuations. Its blueprint for building a bridge considers strong currents, rising tides and adverse weather conditions. A blueprint like that could assist the Nevada government in making accurate projections about the financial future of its pension fund.
Illinois’ PERS Crisis is a Cautionary Tale for Nevada
Illinois had to learn its lesson about overly optimistic PERS accounting practices the hard way. The liabilities of the state’s pension fund rose steadily over the past 20 years, reaching a staggering $143.7 billion in 2024. Illinois lawmakers had to realize that this sizeable financial obligation is not easily covered by investment returns, even if, for some years, the returns are higher than predicted. The accounting standard used to project liabilities and assets held by the fund did not account for market corrections and higher-than-assumed salaries.
Over the past two decades, Illinois’ PERS funding level dropped to around 45%. To ensure the state’s retired teachers, policemen, and firefighters continue to receive their monthly pensions, Illinois Governor Pritzker suggested a plan that included raising income tax and selling the Illinois Tollway. Voters ultimately struck down the plan.
Nevada Taxpayers May Have to Foot the Bill
Just like Illinois, Nevada is obligated to meet its pension payouts. That makes its PERS too big to fail. To cover for shortfalls, Nevada will face two options: reallocate money from other budget lines, meaning essential services such as schools, infrastructure, and public safety may see budget cuts. Or increase taxes and raise the already high burden on Nevada’s working citizens.
Either way, it’s the taxpayer who will suffer. Current government workers are already feeling the pressure. Their mandatory contributions to the fund will increase this coming summer from 33.5% for employers as well as employees and from an already high 50% to 58.75% for police and firefighters.
Safeguarding Nevada’s Financial Future
Nevada needs to act before its PERS funding shortfalls reach Illinois-levels. The Silver State must adopt a more rigorous accounting practice with a conservative approach to calculating the fund’s financial risk. PERS’ financial reports will show higher liability values in its financial reporting. But a more realistic approach to accounting will put Nevada in a better position to plan for its financial future.
We simply cannot afford to maintain the status quo. Join us in demanding transparent and responsible accounting practices before PERS becomes too big to fail.
