Nevada Switch to 401(k)-Style Pension Adds $1.2 Billion Cost, Study Says
Republican Nevada Governor-elect Brian Sandoval
David Becker/Getty Images
Republican Nevada Governor-elect Brian Sandoval.
Republican Nevada Governor-elect Brian Sandoval. Photographer: David Becker/Getty Images
Nevada’s pension system would pay $1.2 billion more over the next two fiscal years than its current obligation to retirees to convert its $24.7 billion plan to one based on employee contributions, a report says.
That’s because switching to a so-called defined- contribution plan, such as the 401(k) offered by companies, would speed up the need for state payments to cover existing benefits, according to a report yesterday to Nevada’s Public Employment Retirement System.
Governor-elect Brian Sandoval, 47, a Republican, has pushed for an employee-supported plan to cut costs for the fund, which has $10.4 billion less than needed to pay benefits, documents for a state bond sale this month show. Alaska, Michigan and the District of Columbia already require defined-contribution plans, said the Nevada report by Segal Group Inc., a Chicago-based consultant.
“We know there are no short-term savings,” Dana Bilyeu, executive officer of the Nevada system, said in an interview from Carson City. “In fact, there is a short-term higher cost.”
States and municipalities are trying to address retiree expenses as the gap widens between the $1.89 trillion of assets they have to pay promised benefits and their estimated $3.15 trillion of liabilities, Joshua D. Rauh, a finance professor at Northwestern University’s Kellogg School of Management in Evanston, Illinois, said in an August study.
Last year, 25 U.S. states contributed less money to their retirement funds than actuaries calculated was needed, up from 23 a year earlier, Loop Capital Markets said in an October report.
$71 Billion Short
New York state’s pension is underfunded by $71 billion, according to the Empire Center for New York State Policy, an Albany-based project of the Manhattan Institute, which opposes taxes and promotes outsourcing to private companies.
Illinois is the worst-ranked state in data compiled by Bloomberg, with only half the assets needed to fund worker pensions. It may have to borrow $3.7 billion to fund its fiscal 2011 contribution.
Defined-contribution plans can reduce potential liabilities and expenses for governments because workers choose investments for their savings and withdraw payments based on results. Conversion can create additional costs, however, because of the need to fund and administer two sets of benefits at once during the transition, the Segal report said.
“Part of the message is, there is no silver bullet,” said Keith Brainard, chief of research for the National Association of State Retirement Administrators.
Investment Shift
Closing a defined-contribution plan to new members and their contributions would force it to shift investments to income-generating fixed assets, which would lower returns and add to the state’s cost of contributing, said Hank Kim, executive director of the National Conference of Public Employees Retirement Systems in Washington.
“There’s absolutely no dispute that a frozen plan is more expensive,” said Kim, whose organization includes 500 public- pension-fund members. Segal is an associate member. “When most politicians look at the cost of it, they end up dropping it,” Kim said. Talk of switching may be “politically expedient,” he said.
Nevada may have to postpone plans to convert because of the cost, said Carole Vilardo, president of the Nevada Taxpayers Association. The state projects a $2.7 billion budget deficit, or about half of general-fund spending, in the two-year fiscal period that begins July 1.
“At this point, we can’t afford it,” said Vilardo. “The concern is in not having enough money with the belt- tightening.”
Benefits Paid
As of June 30, the Nevada pension was 70.5 percent funded, down from 72.5 percent in the fiscal year ended June 30, 2009, according to the bond documents. The fund paid $1.1 billion in benefits to 41,900 beneficiaries in 2009, according to an actuarial report.
Segal’s study may be based on some flawed assumptions, said Northwestern’s Rauh. One is that the state would be required to pay off the unfunded liability at the pace called for in the report. The report also fails to account for the benefit of stopping growth of the unfunded liability, Rauh said.
“I would not use this as a reason to take the option off the table,” Rauh said in a telephone interview.
Governor-elect Sandoval, who hasn’t reviewed the report, “looks forward to meeting with and hearing from” the pension’s staff, Mary-Sarah Kinner, his spokeswoman, said in an e-mail.
To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net. Dunstan McNichol in Trenton, New Jersey, at dmcnichol@bloomberg.net
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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