Las Vegas Sun

September 16, 2014

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Generous pensions could raise taxes, cut services across Southern Nevada

Start with a very generous public payroll on which one of every seven city and county employees made more than $100,000 last year.

Add piles of overtime, then mix in enviable retirement benefits that allow scores of municipal employees to continue drawing their salary, or close to it, for the rest of their lives.

What you have, fiscal analysts believe, is a recipe for a very dark financial cloud on the horizon, one looming ahead for governments throughout Southern Nevada.

If the Las Vegas Valley's unusually lofty salaries for police, firefighters and public administrators pose a challenge for today's budget-makers, an even more daunting task awaits when those workers become retirees drawing pensions and benefits tied to their high paychecks, analysts say.

"It's like anything else," said Daniel J.B. Mitchell, a management professor at UCLA. "You're borrowing against the future. At some time, you're going to have to pay."

Southern Nevadans are already paying. Over the past six fiscal years, local government contributions - taxpayer dollars - toward public employee pensions in the Las Vegas Valley have swelled by 62 percent, a Sun examination shows. That includes hikes of more than 80 percent in the fast-growing cities of Henderson and North Las Vegas.

Since 2001, taxpayers have paid a total of $1.3 billion for pension benefits for local government employees across the valley.

In that period, government payments for retirement plans have grown far faster than the size of the public workforce.

At the Metro Police , for example, pension contributions soared from $50 million in fiscal 2001 to $85.4 million last year, a 71 percent increase. In the same period, Metro's force grew only 29.2 percent, from 3,328 employees to 4,301.

Similarly, Clark County saw its annual payments jump from $61 million to $90.5 million, a 48 percent increase - twice the 24 percent growth, from 6,256 to 7,741, in its number of employees.

Experts attribute the wide gap between pension plan funding and workforce size primarily to higher salaries.

"If you're seeing that kind of a trend, it's a payroll issue," said Dana Bilyeu, executive officer of the state Public Employee Retirement System, which manages pension plans for governments across the state. That system, known as PERS, was created by the Nevada Legislature in 1947 and now has 98,000 members statewide, with a $21.5 billion investment portfolio.

The Sun reported in February that 2,920 (16 percent) of 18,628 public employees in the Las Vegas Valley earned more than $100,000 in 2006, many with the help of large amounts of taxpayer-funded overtime. Nationally, only 5 percent of all workers cross the six-figure income threshold.

At least a small portion of public employee overtime figures into their retirement benefits. That portion is the overtime attributed to "call back" money paid for non scheduled additional work hours required, for example, by a worker calling in sick.

Statewide, contributions to PERS from its 163 public employers have increased by 48 percent since fiscal 2001, compared with only a 19 percent growth in the number of workers covered.

In Southern Nevada, the county and Metro together contributed nearly $839 million of the valley's $1.3 billion payments to PERS over the past six years.

Critics say public retirement benefits not only are far more generous than those in the private sector, but also divert tax dollars from programs and services that the governments are supposed to provide.

"It's a tough thing to stomach," said Peter Ricchiutti, a business professor at Tulane University in New Orleans. "Contributing that much is tough when there are so many other needs."

Kara Kelley, chief executive of the Las Vegas Chamber of Commerce, said her group has worked for years to persuade state lawmakers to "stop the bleeding" and find ways to restrict the flow of taxpayer money to PERS.

"There's nobody working in the private sector in America who has this," Kelley said.

Indeed, corporations across the country have been capping or reducing pension benefits for employees. That's not true in most of the public sector.

According to the Congressional Research Service, government retirees are twice as likely to draw a pension as private sector retirees, and typically receive much bigger pensions. In 2005 the nation's 6 million retired civil servants received a median annual benefit of $17,640, compared with the $7,692 received by 11 million private sector retirees, the CRS found.

As municipal officials grapple with today's budget woes, it is easy for them to think of concerns over rising pension payments as tomorrow's worry.

" Issues that are going to affect the community in years to come don't really rise to the top of anyone's agenda," Kelley said.

Metro's PERS and workforce numbers, however, demonstrate how the issue one day could be at the top of everyone's agenda. With the department's pension contributions increasing at a rate more than double its number of employees, that trend is putting a growing dent in the budget.

Part of the explanation for Metro's wide disparity, experts said, is that PERS sets a higher payment rate to the retirement fund for public safety employees (32 percent) than for other public workers (19.75 percent).

Since 2001, records show, Metro has paid $392.7 million to PERS, while Clark County has contributed $446 million.

Among local cities:

Henderson's payments increased by 85 percent, from $15.7 million in 2001 to $29 million in 2006. In contrast, its city workforce grew by 37.1 percent, from 1,301 to 1,784.

North Las Vegas' pension contributions climbed from $12.9 million in 2001 to $23.2 million last year, an 80 percent increase, more than double the 35.7 percent jump - from 1,077 to 1,461 - in its number of employees.

Municipal leaders, accustomed to paying high salaries and large amounts of overtime to maintain service levels, treat the rising PERS contributions as a necessary cost of doing business.

"It's like a telephone bill," Henderson Finance Director Steve Hanson said. "It's a pain, but you pay it."

That is not the way corporate America has operated over the past two decades, or how most households budget.

If costs rise for households or business, or competition reduces corporate income, they have made adjustments, often at the expense of retirement savings.

But in the public sector in Southern Nevada, adjustments are made in somewhat the reverse fashion, with governments paying first for salaries and retirement plans. That approach takes away dollars that otherwise would be available for housing programs, street upgrades and an array of other civic needs - including more employees to meet growing demands.

Each month local government employers wire money to the pension fund based on the rates set by the seven-member PERS board. Employees and the public agencies for which they work split the cost, each paying half.

When a public employee is eligible for retirement, PERS figures the benefits based on the highest amount earned over three consecutive years. The employee then earns a pension of 2.5 percent of that amount for each year worked before 2001 and 2.67 percent for 2001 and each year after.

The retiree also sees a 2.6 percent annual cost of living increase in checks.

By comparison, much of American industry has ceased providing defined benefit pensions to new employees. Indeed, while 80 percent of government employees today have traditional pension plans, the U.S. Labor Department says that only 20 percent of private workers do.

For existing employees, corporations have curtailed retirement benefits by such measures as tying retirement pay to the current year of service. That means an employee will receive no credit for future raises when it comes to calculating retirement pay.

Corporations also have eliminated cost of living increases for retirees and have changed the formulas used to calculate retirement benefits. For example, instead of basing retirement pay on the highest salary over three years, corporations reduce the benefit by basing it on employees' average pay - usually a lower figure - throughout their careers.

None of that is true in the Southern Nevada public sector. Here, an employee who retires this year after working for 25 years would earn at least 63.35 percent of income for life. So if his earnings average $100,000 during the three most lucrative years, the payout would be $63,350 every year - a formula that, after 20 years, would have cost taxpayers more than $1.5 million.

A retiree who worked for 30 years would earn 76 percent of his salary, and 40-year public employees would receive 100 percent of salary until death.

That troubles Nevada Taxpayers Association President Carole Vilardo, who fears taxpayers will be asked to dig even deeper into their pockets in future years to bail out local governments.

The more money that governments set aside toward compensating public employees, Vilardo said, the less they have for programs and services.

"Eventually, governments are going to say they're not able to maintain this level of service, and they will say they need more taxes," Vilardo said.

Some states - Illinois, Indiana, Michigan, New Jersey, Ohio and West Virginia - have troubled retirement systems that may require huge tax increases, spending cuts or even defaulting on promised benefits.

Several California cities also face pension deficits. San Diego nearly had to shut down its public library system several years ago because of a budget crunch prompted by pension payments.

William Robinson, an economics professor at UNLV, said he does not understand how governments can continue to offer plum pension plans without incurring the public's wrath.

"If you work for the government and you start at 21 and retire at 51 with about an 80 percent pension, it's hard to justify that," he said.

"I wonder whether the state in the long term needs to be in the pension business."

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