Would you purchase a house with a cracked foundation? The seller assures you it’s a minor issue and an easy fix. The estimated repair costs are $5,000. Doable, you think. But after purchase, you realize that the cracks run deeper. Your repair costs just tripled to $15,000. At this point, the house is yours, and you’re stuck with the bill.
That’s exactly what’s happening with Nevada’s Public Employees’ Retirement System (PERS). The fund’s most recent annual financial report claims $18.3 billion in unfunded liabilities. But if a more realistic accounting method is applied to examine the fund’s health, we find that the financial shortfall is far greater. PERS’ actual liability could be as high as $41 billion.
Guess who will be stuck with the bill. Nevada taxpayers.
The Illusion of a Well-Funded System
The current actuarial accounting method used to calculate PERS’ future cash reserves is all smoke and mirrors. The money that flows into the account through monthly contributions by government employees is invested to generate returns. These returns are intended to cover present and future pensions, survivor benefits, and disability retirement payments.
However, actuarial accounting allows the assumption of a 7.25% annual return on investments, which is high and far too optimistic. For one, it does not take market fluctuations into account. Although the US economy is growing, no one can predict the next downturn or recession. The unrealistic growth expectation obscures the actual financial risk to which PERS is exposed.
Why Optimistic Math Won’t Cover the Shortfall
Second, this optimistic growth rate obscures the fund’s future liabilities. The assumed high rate of return creates the illusion that PERS is well positioned to cover upcoming funding gaps. Thus, the State of Nevada budgets far less than required to sustain the fund long-term.
It’s as if Nevada is planning for a beach party years in advance while only considering the best conditions possible: pleasant temperatures throughout the day and sunny weather. They are not planning for the worst-case scenarios. A responsible party would take this into account. The current PERS accounting standards do not, making PERS look healthier than it is.
Taxpayers Are Left Holding the Bag
When pension systems fail to accurately predict their upcoming liabilities, it’s the taxpayer who foots the bill. To bridge funding gaps, lawmakers often turn to tax increases, budget cuts, or bailouts to make up for the deficit. This is avoidable. Lowering the assumed rate of return will show a more accurate picture of PERS’ financial standing and allow Nevada to budget before the funding gap widens.
This problem is already crippling other states. Illinois’ public pension system, for example, has a 60% funding gap. To meet its financial obligations, the Illinois government has raised property taxes to the second-highest rate in the country and more than double the US median rate. Their homeowners are paying the price for unrealistic accounting standards. Nevada must act now before it follows the same financially disastrous path.
Demand Responsible Pension Reform
The people of Nevada deserve a sustainable retirement system. One that provides a fair payout to teachers, government workers, and service members without putting taxpayers at unnecessary risk. Contact your representative and demand fiscally responsible accounting standards for PERS. Before the funding deficit becomes unmanageable.
