Why Reform Matters
In nearly every state, to be read on the front page of nearly every newspaper, the economic problems of the last several years have forced an examination of the way we run our states, provide education to our children and services to those in need, and retrain our workforce to be competitive in a global environment.
The combination of greater needs and reduced revenue has elevated the importance of correctly and effectively spending each and every taxpayer dollar. Nowhere is this more true than in Nevada.
In past decades, when the economy in our state was leading the nation, we could afford to give our public employees raises that out-stripped the cost of living. We could afford to provide those same employees with very generous retirement benefits. Even without a top-notch education, our children could get higher-paying jobs than most, so we could allow our high school and college graduation rates to sag. We could do all those things and still thrive. And we did.
If we had known then what we know now, maybe we would have made different decisions. Maybe we would have provided local governments every opportunity to keep employee pay in line with their counterparts at the state and maybe local elected officials would have taken that opportunity and done so. Maybe we wouldn't have promised the most generous retirement benefits in the country, particularly since those promises are irreversible. Maybe we would have been more diligent in determining the causes of dwindling graduation rates and demanded changes sooner. But we didn't.
Because of the decisions we made, the difference between what we pay local government workers and their counterparts at the state and in the private sector is about $1 billion every two years. We pay more than $500 million every two years in an attempt to pay down our unfunded retirement system liability yet that liability continues to grow. We pay $100 million for retiree health insurance, often for employees who will receive this benefit for longer than they worked for the state, and if that benefit is left unchanged the cost will grow exponentially. We don't fund the retirement health care promises we are making, creating a $4 billion unfunded liability. We have the lowest high school graduation rate in the country and one of the lowest percentages of college graduates as well.
If we had made different choices in the past, if 10 or 15 years ago we had chosen to implement the recommendations that follow, our situation would be different now. We would have enough existing revenue to fund the state's budget.
We wouldn't be talking about having to use school bond reserves or borrowing against future insurance tax revenues to help fill the hole in the state's budget.
We wouldn't be choosing between reducing teacher pay or increasing class sizes and we would have a higher high school graduation rate.
We wouldn't be faced with the specter of closing community college campuses, eliminating whole programs at the university level, and turning away potential college students.
We wouldn't be choosing between caring for autistic children or adults with a gambling addiction.
We wouldn't be facing the prospect of closing mental health facilities only to see those patients enter emergency rooms.
The choices we made in the past are limiting our options now. The choices we make now can, over time, expand our options, provide the best opportunity for recovery, and return Nevada to prosperity. Or not.
That is why reform matters.
Fixing the Problem
Local government pay needs to be adjusted over time, with new employees hired at wages that are competitive, but in line with their state counterparts and the private sector. Salaries for current employees should be brought in line more quickly in order to avoid laying people off.
The following is the Chamber's agenda for reform that we are advocating during the 2011 Legislature:
Reform Priority: Reform the Collective Bargaining Process and Adjust Local Government Pay
Although our state has been going through the toughest economic period in our history, Nevada continues to have some of the highest paid public employees in the country, particularly at the local government level.
Many private sector workers took significant pay cuts in order to maintain their jobs, yet Nevada's state and local public employees are the 9th highest paid in the country, with average annual salaries that rose 2.2 percent in 2009.
While state employees earn 107 percent of the national state average, local government employees (excluding teachers) earn 129 percent of the national average. There is well over $1 billion every two years in the difference between what Nevada pays its public employees versus the national average.
Topping the list are firefighters, earning 149 percent of the national average; water supply employees (144 percent of national average); other fire employees (139 percent of the national average); and sewerage employees (133 percent of the national average).
Beyond the question of fundamental fairness, higher-than-average pay increases Nevada's public employee retirement obligations. High salaries have also resulted in Nevada having the least public employees per person in the country, meaning there are fewer employees providing services to the people of Nevada.
It is difficult to adequately adjust public employee pay without reforming the rules governing public employee collective bargaining for state and local government employees – Nevada Revised Statutes Chapter 288. NRS 288 requires binding arbitration, shifting decision-making and budget control from the officials elected to make those decisions to an arbitrator often from outside Nevada. Binding arbitration should be eliminated and final decisions should be left with those elected to make them.
Reforming NRS 288 to allow for collective bargaining agreements to be opened in the event of a fiscal emergency would bring flexibility to managing fiscal challenges while continuing to deliver public services. Additionally, evergreen clauses in all newly negotiated collective bargaining agreements should be prohibited.
The public sector is the only part of our economy in which managers can be represented by a union. In the private sector, the National Labor Relations Act prohibits managers from being in the union of those they supervise. Nevada needs to eliminate collective bargaining for managers, and the problems associated with the conflicts involved when supervisors are unionized.
Reform Priority: Fix Public Employees' Retirement System (PERS)
Nevada's Public Employees' Retirement System (PERS) is one of the most generous public employee retirement systems in the nation due to the combination of an aggressive annual retirement benefit, favorable policies regarding when a public employee can retire and the low amount (if any) that employees are required to contribute to their own retirement, all applied to higher-than-average salaries. PERS is a defined benefit system in which a retired public employee receives a set monthly amount upon retirement, guaranteed for life, and includes a generous cost-of-living increase each year.
PERS poses two significant and distinct problems. The system has an unfunded liability in excess of $10 billion, up from $6.4 billion just two years ago. Additionally, the cost of providing this benefit and attempting to contain the unfunded liability is simply too high, particularly for local government employees who typically have little or no money taken from their paychecks to help pay for their retirement.
As of July 1, PERS will require a contribution, in addition to pay, of 39.75 percent of pay for police and fire employees and 23.75 percent of pay for all other employees. Of those contributions, more than $500,000,000 every two years is paid by taxpayers in an attempt to pay down PERS' $10 billion unfunded liability – money that could be used to provide the services our citizens need right now.
There are several potential ways to fix PERS, but the focus should be on reducing taxpayers' cost of providing the benefit and reducing the unfunded liability. It's important to point out that any changes would only apply to new employees – those not yet hired.
Those potential methods include moving to a defined contribution system (although this option is admittedly difficult to implement), allowing our employees to participate in Social Security (we are only one of seven states in which employees don't participate), and providing a much smaller PERS benefit or provide what is often called a cash-balance program in which contributions made on behalf of each employee, plus a guaranteed return on that investment is used to purchase one in a series of optional annuities. All of these systems would allow much greater portability for employees.
Also, a key to real reform of PERS is requiring all employees to participate in funding their own retirement through payroll withdrawals.
Reform Priority: Discontinue State Retiree Health Insurance Subsidy for New Employees
State employees currently are eligible for retirement health care subsidies after only 15 years of service. This is a benefit largely unavailable in the private sector or for local government employees.
The state has not set aside money to pay for this promised benefit. Instead, the state pays the premium for retirees each month – a pay-as-you-go system. By choosing this funding method and not setting aside money when those benefits are earned, the state has created a $4 billion unfunded liability.
In fiscal year 2009, Nevada paid $44 million to cover this benefit for current retirees, representing just 15 percent of the $287 million Annual Required Contribution (ARC), the third lowest contribution rate in the nation.
If Nevada continues to pay for this benefit on a pay-as-you-go basis, the $44 million FY2009 cost will rise to approximately $200 million in 2023 and $600 million in 2038. Discontinuing the retirement health insurance subsidy for new employees will reduce the unfunded liability over time, eliminating it at some point in the future.
Reform Priority: Transform K-12 System to Encourage and Reward Results
It is no secret that K-12 education in Nevada needs improvement. A recent Chamber study consolidated data on student achievement and allowed a consolidated view of our current situation – Nevada has the lowest high school graduation rate of any state in the country, too few of our students are going on to college, and while those students who take SAT and ACT tests perform closer to the nation's average scores, we have too few taking the tests and even attempting to go to college.
Education governance in Nevada is confusing at best. All Governors aspire to make improved education part of their legacy, however the reality is that our Governors have only had authority over education through the budgeting process. They have no authority to change how education is delivered. That authority rests with a myriad of boards and committees, too complicated to even attempt to explain. Oversight of education must be streamlined and Governor-led.
Our children need and deserve great teachers – and we have great teachers now. Those great teachers should be compensated for their performance. But when we grant tenure to teachers after just a year or two and virtually no teachers have, in recent years, been removed for poor performance, we also must admit that some teachers may not be in the right profession. We need to eliminate tenure for K-12 teachers and ensure high quality teachers by requiring student improvement be a significant portion of teacher evaluations. When we find underperforming teachers, we need to give them access to best practice teacher training. Only after solid efforts to help them improve performance should sub-standard teachers be removed from the classroom. But a system that protects poor teachers at the expense of our children cannot continue.
Additionally, there should be available solutions if entire schools are not performing and parents should be able to choose which school is best for their children. Expanding opportunities through enhanced charter school programs, open enrollment and, potentially, a voucher system should be pursued. Accountability and competition may be overused words, but those concepts provide potential improvement, particularly when our school districts encompass entire counties.
And we need to eliminate social promotion of students, making sure that our children are prepared to advance to the next grade. Students who are advanced despite not be prepared stand a strong chance of never being able to recover. Making sure students are ready for the next grade level is a key component of improving graduation rates.
Reform Priority: Retool Higher Education for Nevada's Future
Nevada's higher education system's funding is centered around the number of students enrolled at each institution. As a result, each school has a strong incentive to enroll as many students as possible, regardless of whether the school is a good fit for a student that will result in the student graduating. This is a waste of both the student's and taxpayers' money. In addition, the per pupil funding system makes it difficult for our research universities to provide advanced, and expensive, programs that are necessary to generate advanced research that will fuel new companies and jobs.
This entire funding structure needs to be rethought. Currently, additional tuition dollars generated by the higher education institutions are not kept within the higher education system. We need to rethink that policy. Our higher education schools need to be incented to be entrepreneurial, to work in cooperation, to place students where they best fit, and to be aligned with our economic development plans.
And our higher education system needs to focus on graduating students, particularly in degrees we most need in Nevada, not simply attracting a large number of freshman students to campuses. The mission of each institution should be clearly defined, a plan for continued improvement clearly articulated, and results clearly measured.
Reform will not be easy. But fixing these problems now is necessary in order for Nevada to take full advantage of the possibilities for a vibrant future.
