For the past 8 years, Nevada’s Public Employee Retirement System (PERS) fund has operated under the assumption that it can achieve return rates between 7.25% and 7.5% on its investments. Over that time period, many global events have influenced our current economic climate: a health pandemic brought the world to a standstill, two different U.S. Presidents held office, the UK left the European Union, and geopolitical tensions disrupted global energy markets and supply chains.
While the current assumed 7.25% rate of return might have been relevant under different economic circumstances, today, the investment strategy used for PERS requires a much-needed overhaul to close its increasing $18.3 billion funding gap.
A Few High Notes Can’t Save the Song
PERS‘ assumed rate of return is like a singer hitting only a couple of very difficult high notes in a song but consistently missing the melody. Striking a handful of successful notes doesn’t make a good performance. No matter how hard the singer tries. PERS only met or exceeded its assumed rate of return six times. Its high notes only mask a pattern of underperformance, leaving PERS exposed to critical gaps in funding. This is basic math: When returns fall below expectations, the gap can’t disappear. It will only increase over time.
High Stakes but Low Returns
A reason for the lower rate of return is the Federal Reserve’s policy of lower interest rates. Over the past decade, Treasury has steadily lowered this rate. This new historic low point adversely impacts the investment returns Nevada’s PERS can achieve. This is because government and corporate bonds make up about 28% of its investment portfolio.
In any other investment climate, relying on bonds would be a sensible decision. Although yielding much less returns than stocks, bonds are a stable investment. They are an IOU note of money loaned, which is paid back over time and with interest. Bonds are not subject to market fluctuations, unlike stocks. However, the lower interest rate set by the Treasury means lower return payments for bondholders. As a result, many government-funded retirement funds, including Nevada’s, must rely more heavily on riskier investments with a higher yield to close their funding gaps.
PERS Will Become the Taxpayers’ Burden
A 7.25% assumed rate of return looks good on paper. Lowering it is not a popular move, as a more conservative assumed return on investment would automatically increase the fund’s reported liabilities. It is easy to see why such a move does not seem appealing to PERS managers. But working with conservative assumptions would provide a more honest assessment of PERS’ financial health. And allow for proactive measures to address shortfalls before they spiral out of control.
Because PERS’ unfunded liabilities must be covered somehow. To do so, Nevada has several options: increase the already high contribution rates of its current government workers, cut budgets from other essential government services to channel into PERS, or raise taxes. Either way, it’s the taxpayer who is left holding the bag.
Nevada Must Rethink PERS’ Assumed Rate of Return
Low Federal Reserve interest rates are here to stay. Nevada’s policymakers must act now and adjust PERS’s rate of return. Otherwise, Nevada citizens will pay the price for years of financial mismanagement. Let your representative know that Nevada can only achieve a prosperous future through fiscal responsibility. Advocate for a realistic rate of return for PERS.
Your Voice Can Make a Difference
Use the form below to email your Nevada state legislators directly, urging them to reform PERS before it is too late.
