Nevada’s over 184,000 public employees keep the state running. Our policemen, teachers, firefighters, and clerks go to work every day to ensure Nevada remains safe and well looked after. Depending on their age, agency, and years of service, government workers can look forward to a pension starting at age 50, disbursed by the Nevada Public Employee’s Retirement System (PERS).
PERS pays out a guaranteed, lifelong pension to veterans of public service. To meet its financial commitments, PERS needs to be adequately funded. Currently, it is not, and its financial deficit will only deepen over time.
Investments and Contributions Fund PERS But Fall Short
Two income streams fund PERS: contributions of government agencies and employees, as well as an investment portfolio consisting of a mix of stocks, U.S. bonds, and private market investments, such as real estate. Its monthly contributions are predictable, but insufficient to fund PERS‘ growing liabilities.
The funds’ various investments are supposed to cover any financial deficit and support the financial health of PERS over time. Investments in financial products are subject to market fluctuations and anyone who remembers the 2008 financial crisis knows that unless you have a crystal ball, their actual return rates are difficult to predict.
Actuarial Accounting Exacerbates PERS’ Funding Gap
The Nevada government uses actuarial accounting to evaluate PERS’s financial health. This accounting standard uses an assumed 7.25% rate to calculate investment returns. This rate is akin to yields returned by one of the riskiest financial products: stocks. Stocks can produce high returns, but they are also volatile. Although actuarial accounting has been Nevada’s standard practice for years, it is an unreliable and overly optimistic way of planning for the financial health of a government pension fund.
A market-based approach to accounting, on the other hand, would paint a more realistic picture of PERS‘ financial health. Market-based accounting uses a lower assumed rate of return, one that resembles a less risky portfolio investment, such as government bonds. A bond is a type of financial products that allows you lend money to a company or government for regular interest payments, plus your money back when the bond ends. Bonds are low risk but yield lower returns, averaging around 3%.
Market-Based Accounting Delivers More Realistic Projections
Projecting a lower rate of return will allow Nevada to set enough money aside to cover PERS’ deficits. It’s simple maths. If you were to buy a car, wouldn’t you ensure you have enough money to cover your monthly payments plus interest? Imagine you’re saving for a car with a cost of $10,000 over five years. Using the actuarial accounting method for your savings plan, you assume your investments will grow by 7% annually. Based on that calculation, you will only need to save $7,129, relying on your investments to cover the rest.
With the market-based accounting method, your calculations will be based on the much lower growth rate of 3%. Now, you need to save $8,624 because you project more cautiously how much your money will grow. The market-based approach ensures you are prepared even if your investments don’t perform as well as hoped.
For PERS, a the market-based approach to accounting would minimize surprises and ensure the fund’s obligations are adequately financed.
Act Now to Protect Nevada’s Public Pensions
Nevadans work hard for their money. Their tax payments and paycheck contributions deserve the highest standard of fiscal responsibility. Before the PERS funding gap deepens even further, use the form below to contact your representative. Let them know that Nevada must adopt market-based accounting practices for PERS to ensure more accurate financial reporting. We need pensions without crystal ball predictions.
