When the Nevada Legislature meets in the spring it’s going to have to sharpen a lot of pencils to figure out how to balance the coming biennial budget.
Lawmakers must contend with growing public school enrollment, growing Medicaid enrollments, growing personnel costs and still relatively stagnant tax revenue.
The Carson City newspaper recently calculated that even if the $1 billion in temporary tax hikes — scheduled to be sunset on June 30 — are extended once again, the revenue will fall $120 million short.
But that’s not even the half of it, according to a recent report by a think tank called Truth in Accounting. You see, Nevada like most states manages to balance its current spending and current revenue by ignoring billions of dollars in obligations.
Truth in Accounting says the biggest culprit is public employee pensions. “Pension benefits are a part of employees’ compensation. Employees earn the benefits by providing services to current taxpayers. The elected officials gain political favor by promising these benefits,” the report says. “But they do not put money aside to pay them. They argue, ‘Hey if I don’t write a check for current costs. I don’t have to include it in the budget calculations.’ This is the reason many states have huge unfunded pension liabilities.”
Nevada has the 33rd worse budget shortfall among the states, failing to cover $2.7 billion of its $2.9 billion in pension liability. That amounts to financial burden of $3,100 per taxpayer.
“Nevada statutes require the legislature to pass a balanced budget. One of the reasons Nevada is in this precarious financial position is state officials use antiquated budgeting and accounting rules to report Nevada’s financial condition. Since employee retirement benefits are not immediately payable in cash, the related compensation costs have been ignored when calculating balanced budgets,” Truth in Accounting explains.
One way for lawmakers to begin to whittle down is huge unfunded obligation is to change its pension system from a defined-benefit plan, in which retirees get a percentage of their final salaries, to a defined-contribution plan, in which the state and the employees contribute money into a 401(k)-style fund.
In the 2013 Legislature, Republican Reno Assemblyman Randy Kirner introduced a bill to begin the transition to such a pension system. Assembly Bill 342 died without a whimper in the Assembly Ways and Means Committee, axed by the Democratic committee chairwoman.
Kirner’s bill would have created a hybrid retirement program for new employees hired after July 1, 2014. It would have been a half defined-benefit and half defined-contribution plan. It included a cap on annual benefits and a prohibition against workers buying years of service credit. This little scam allows some public employees to work for 25 years, purchase five years of service credits, and retire at the age of 45 with 75 percent of their top pay adjusted for inflation for life.
According to a study for the American Enterprise Institute by resident scholar Andrew Biggs, Nevada’s public pensions are the richest in the nation — $64,000 a year or more than $1.3 million in lifetime benefits. That doesn’t include public-safety workers, such firefighters and police, who can retire earlier and generally have higher salaries.
In fact Biggs has calculated a debt even higher that Truth in Accounting. He says that by using economist-preferred fair-market evaluations the annual contributions to cover costs and amortization of pensions would be $5.8 billion. The state’s annual general fund budget is only $3.3 billion.
Such a plan as Kirner put forward would only slow the financial bleeding, not stop it, but it would be better than nothing.
The state’s lawmakers need to get serious about balancing the state’s finances instead of cowing to public employee unions.