Here comes the “fun” part. As I mentioned in the prior post, the asset side isn’t the problem for Nevada pensions. No, it’s not making the target 8%, but no plans are making that. The bad part isn’t the asset performance, but the assumption that 8% could be achieved in perpetuity.
But I’m getting ahead of myself.
PUBLIC PLANS DATABASE GRAPHS
For this one, I have to use the pages for both the state plans in the Public Plans Database. The asset returns may behave the same, but that doesn’t mean the funded ratios are the same. Even if the benefit formulas were the same (and I’m not even checking if they are), the police population versus the other government employees are likely to have different patterns of salaries, retirement, mortality, etc.
Let’s check out the contribution patterns for the two plans.
Nevada Police and Fire:
Nevada Regular Employees:
Okay, that huge drop for the Police & Fire in 2014 is very suspicious to me.
But the rest of the pattern for both are increasing percentage of payroll “required” for contributions. And while they’re close to contributing 100% in some years, they pretty much never make full contributions.
Finally, the Police and Fire plans have much higher required ARCs are % of payroll, which is pretty common for Police & Fire plans.
Let’s check out what the funded ratios have done:
NV Police and Fire:
NV Regular Employees:
So the funded ratios are fairly stagnant. Have been improving in recent years, but barely.
Note that in 2001, when many other plans were looking at 100% fundedness due to the top of the market, the Nevada plans barely squeeze past 80%. I’m sure they thought that was “healthy”.
ROBERT FELLNER COMMENTS
What is surprising, however, is the depth of the so-called pension fog that has enveloped Nevada policymakers, keeping teachers trapped in a failing system.
Despite the pension crisis receiving national attention — with most of Nevada’s neighbors having already enacted reform or at least actively embracing the conversation — Democratic Senate Majority Leader Aaron Ford proudly declared that reform wouldn’t even be considered here.
Ford reportedly told a local news organization that those seeking to fix the system were “wasting their time,” while describing PERS as “entirely satisfactory.”
Yet, even when measured by the system’s own terms, this isn’t true.
Not a single one of the four objectives outlined in the retirement board’s funding policy — becoming fully-funded, ensuring stable costs, spreading those costs fairly and employing a transparent funding policy — has been achieved.
The system has never come close to being fully-funded at any time in its history, with today’s 72 percent funded ratio barely above the level from 30 years ago. Meanwhile, the past decade’s 40 percent cost hike has left new teachers paying national-high rates, while receiving the lowest PERS benefits of any member in more than a generation.
Let’s check this!
I didn’t have the Nevada plans in my plot of 100% ARC-paying plans, so I’ll just add in Nevada (and change the axes to make it easier to look at):
So… Nevada is at funded ratio levels akin to other plans which were paying 100% ARC (which are the other points). But they’re not anywhere near 100%, either in 2001 or 2015, as we saw above. Fellner is correct on this score.
Back to his piece:
The confusion over PERS has even infected the local media. A recent article, for example, mischaracterized the system’s unfunded liability as being the amount the State would have to pay in the event all future debts came due immediately. The actual cost in that imaginary scenario would be much closer to $100 billion than $13 billion — which has been discounted based on assumed future investment returns.
It’s not only future investment returns that’s involved. It’s assumptions over when people retire, the amount they’ll get paid, how long they’ll live, etc.
But we’ll get back to that in a bit.
But that’s beside the point. A rising unfunded liability matters because, just like any other form of government debt, it translates to higher costs today. As PERS unfunded liability continues its meteoric rise — up more than 600 percent since 1995 — so too does the amount deducted from teacher paychecks.
After the amount docked from teacher salaries hit a record-high 28 percent of pay in 2015 — an increase which went entirely toward debt, not their own benefit — the topic of teacher complaints dominated numerous PERS board meetings.
This mess all stems from the Legislature having failed to impose proper oversight and funding requirements from the start, an error exacerbated by blindly passing unaffordable enhancements over the years.
When the cost of these enhancements became too large to ignore, public unions gleefully supported slashing benefits for future hires, while still requiring them to pay the same record-high rates as those receiving unreduced benefits — leaving all new hires “net losers” who will receive a retirement benefit worth less than its cost.
This grossly unfair and inefficient compensation structure is likely to “negatively affect current teacher quality and retention,” according to scholars at the Bureau of Labor Statistics.
It’s time to stop penalizing Nevada educators for the Legislature’s past mistakes. If he’s truly an advocate for teachers, Ford should be doing everything he can to lift the fog around pensions — not proudly contributing to it.
Okay, Fellner, that’s cute. Politicians are not known for actually exposing what’s going on. Otherwise they’d not make politics their careers.
It takes getting rid of the bums if you really want some light shone on the issues.
FURTHER INVESTIGATION OF LIABILITY ISSUES
So let us consider the following items from above:
- The funding ratio has never been above 90% since 2001 for either plan
- The percent of payroll needed to cover the ARC has only been climbing (except for a suspicious year)
- The funding ratio isn’t getting appreciably better
What might be feeding into these?
Thanks to Fellner for pointing me to the state plan info. I looked into the assumptions other than the 8% investment return (which obviously contributes to the shortfall, when assets don’t perform that well).
The Public Plans Database was updated only up to 2015 data, but the official site has the 2016 CAFR. So let’s check it out!
The mortality assumption looks somewhat reasonable, but…
Here it is from the 2016 CAFR:
RP-2000 Combined Healthy Mortality Table projected to 2013 with Scale AA, set back one year for females (no age setback for males).
RP-2000 Combined Healthy Mortality Table projected to 2013 with Scale AA, set forward one year.
Disabled: Regular and Police/Fire
RP-2000 Disabled Retiree Mortality Table projected to 2013 with Scale AA, set forward three years.
Now, you may be saying to yourself “but this is the 2016 CAFR — why is it projected to 2013?”
Well, that’s because this is the exact same mortality assumption for 2015, and 2014, and 2013. They’re not only not projecting mortality for future years, they’re not even projecting mortality to the current year. I believe they’re changing these assumption sets only every-so-often, and the assumptions aren’t set to automatically update each year. Mind you, this is not unusual for public pensions.
The payroll increase assumption is a bit more dodgy — and by “a bit”, I mean a lot more dodgy.
Payroll Growth Assumption for Future Years:
6.5% per year for regular employees and
7.5% per year for police/fire employees
Let me graph the payroll info I have from the Public Plan Database, shall I?
Well, that’s difficult to see percentage changes, other than there are some years of negative growth.
Yeah, there we go. Many years ago those payroll increase rates would have been reasonable.
They’re not now.
The compound average growth rate for the two from 2001 – 2015 were: 4.0% (for police/fire) and 3.4% (for regular employees). That compounds on top of the investment return shortfalls.
No wonder the required contributions keep climbing.
If you’d like to see some jabber over valuation assumptions, check out the video here, around the 1 hour mark.
Doing an experience study every 5 years is not unusual… but they should have caught the payroll growth problem in the last study.
The actuary has had the following boilerplate in the actuarial reports since FY 2014:
For funding purposes, to amortize the unfunded portion of actuarial accrued liability under the level percentage-of-payroll amortization method, the dollar amounts of calculated amortization payments increase in direct proportion to the assumed payroll growth rates of 6.5% per year for regular employees and 7.5% per year for police and firefighters. These payroll growth rates are based on a 3.5% per year inflation assumption.
The payroll growth assumptions are set by the Board and affect the timing of payments toward the unfunded liabilities. Considerations for setting these assumptions include future financial conditions that are difficult for Segal to evaluate. In recent years, payroll growth has been less than assumed. This has the effect of delaying contributions toward the unfunded liabilities and could result in increases to required contributions in future years. We recommend that the Board closely monitor actual payroll growth to verify that the assumptions remain valid.
This is about as direct a “HINT HINT YOUR ASSUMPTIONS ARE OFF” you’re going to see in an third-party actuarial report. The actuaries can’t but notice the huge disparity between actual experience and the assumption set that the Board sets.
Politicians like to throw around the phrase “actuarial assumptions” as if the actuaries had anything to do with it. They didn’t. The BOARD set the valuation assumptions.
I can’t comment on the mortality experience, because I’ve not seen that experience study. But I can look at covered payroll, and I can look at investment returns, and I can say those assumptions are not being met from 2001 – 2015.
There may be cases where the external actuary recommends specific valuation assumptions, but that tends to be for small, local plans. For large, state-wide plans, usually some sort of state-level politician (or groups of people appointed by said state-level politicians) are the ones setting the valuation assumptions. Many times, there are no actuaries involved in that decision.
THE ULTIMATE PROBLEM
Nevada may not have the worst-funded pension plans in the country, but they do have a problem when it comes to the following:
Ten percent of state revenue being eaten up by pension costs.
There are some good points, to a certain extent: they’ve got a “younger” population than many states. But… that advantage is going away:
As Fellner says, the problem is far from fixed. It would be nice if there were a realization that the assumption sets making the pension plans look cheaper in the short term are making the long term problem worse.
Kentucky County Pensions: 60 Percent Fundedness and Decreasing is Awful
South Carolina Pensions: Liability Trends
Kentucky Update: Republicans Take Legislature, Pensions Still Suck, Hedge Funds to Exit