The Committee on Government Affairs was called to order at 8:09 a.m., on Thursday, February 4, 1999. Chairman Douglas Bache presided in Room 3143 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Mr. Douglas Bache, Chairman

Mr. John Jay Lee, Vice Chairman

Ms. Merle Berman

Mrs. Vivian Freeman

Ms. Dawn Gibbons

Mr. David Humke

Mr. Harry Mortenson

Mr. Roy Neighbors

Ms. Bonnie Parnell

Ms. Gene Segerblom

Mr. Kelly Thomas

Ms. Sandra Tiffany

Ms. Kathy Von Tobel

Mr. Wendell Williams

GUEST LEGISLATORS PRESENT:

Assemblyman Morse Arberry Jr., District No. 7, Clark County

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

BDR 31-666 – Makes various changes regarding certain funds and accounts. (A.B. 124)

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BDR 19-673 – Makes various changes concerning notaries public. (A.B. 127)

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BDR 30-994 – Makes various changes to provisions governing authorization, sale and issuance of state obligations. (A.B. 128)

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BDR 31-995 – Revises certain limitations on investment of state money. (A.B. 129)

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George Pyne, Executive Officer, Public Employees’ Retirement System (PERS), was introduced and presented members of his staff: Dana Bilyeu, Operations Officer; Laura Wallace, Investment Officer; Ken Lambeth, Administrative Analyst; and Karen Kimble, Administrative Assistant. Mr. Pyne referred the committee to the handout (Exhibit C), and gave a brief overview of PERS.

PERS was created in 1947. In 1949 it started paying benefits to 64 retirees. It had 3,000 members at that time. Today, he said, PERS had about 75,000 members and 20,000 benefit recipients. PERS paid out over $300 million yearly to those recipients.

Dana Bilyeu, Operations Officer, discussed the time line of PERS. When PERS was established in 1947, social security coverage for public employees was not available. Many local governments had established retirement systems in order to attract employees to the public sector, but were having a difficult time doing it because funding a retirement system proved expensive. In 1947, the legislature brought all of the local government retirement systems together and funded a multiple employer plan. In 1967 the Legislative Retirement System was created. After extensive study in 1973, it was decided to remove PERS from central state government, because the state was only one of many employers represented. The Clark County School District had more employees in PERS than the State of Nevada. The legislature decided to create PERS as a public agency, thereby effectively removing control of the system by the Clark County School District.

Also in the 1970’s, Ms. Bilyeu continued, full actuarial funding was instituted, meaning the contribution rate that individuals and employers paid into the fund recognized the cost of all benefits in order for those benefits to be added to the system. At the same time, the legislature created an interim retirement committee to review PERS’ practices, a committee still in existence.

Finally, in 1977, the Police Fire Fund was created, with objectives differing slightly from the regular retirement fund. In order to attract qualified and younger individuals into front-line law enforcement and fire fighting, those people were allowed to retire earlier, thus maintaining a public sector with essentially younger personnel.

A seven-member board of directors governed PERS, Ms. Bilyeu said. She described in some detail the structure of the board.

Highlighting some of the legal obligations of PERS, Ms. Bilyeu explained that PERS was a trust fund created by the Nevada Constitution. That meant that retirement funds could only be used for payment of benefits and related costs. In 1996, Question 1 was voted onto the ballot by the legislature. It gave the retirement system more constitutional protection. Ms. Bilyeu cited a case in California where the governor, having difficulty balancing the budget, had "borrowed" funds from the California Public Employees Retirement System, which ended by the governor being sued for restitution. Question 1 provided that no loans could be made to the state from PERS, and that PERS could not invest in state obligations. An independent actuary determined contribution rates, thereby preventing manipulation of rates during times of budgetary problems. Finally, it provided that the system was governed by an independent board.

Ms. Bilyeu described vesting of retirement benefits in some detail. She then explained that PERS is a 401K qualified/deferred benefit program, which basically meant that income taxes were not paid on the investment income of the fund. She defined plan design issues, wherein the basic benefit was that for every year of service earned in the retirement system, a retiree would earn 2.5 percent of compensation of their highest 36 months of pay.

Ms. Bilyeu discussed retirement eligibility and cited the examples of police and fire fighters as having slightly different retirement ages.

George Pyne explained since PERS was funded on an actuarial reserve basis, contributions were set aside and invested in order to pay for all expected future benefits. In other words, he said, "I am paying for the cost of my benefits in the year in which I am earning them." PERS, he continued, was nearly 80 per cent funded, which meant that basically there was 80 cents on hand for each $1 of plan liabilities. In 1984, the legislature established a funding schedule to pay off the system’s unfunded liabilities over a 40-year period. At that time the system was 55 percent funded compared to the current 80 percent funding.

The two contribution plans, Mr. Pyne continued, were the employee-employer joint contributory plan and the employer pay contribution plan. He discussed contribution rates in detail.

Membership growth went from 34,000 members in 1976 to 76,000 projected for July of 1999. Benefit recipients, Mr. Pyne said, had been growing at about a 6 percent per annum rate, from 4,000 in 1976 to 21,000 projected for 1999. He said that by the year 2024, the plan expected to be fully funded.

The Legislators’ Retirement System was discussed. Created in 1976, it was also a defined retirement plan. Under the plan, a legislator received a benefit at retirement based on his or her years of service, but unlike PERS, a legislator had to have 10 years of service in order to be vested, and received a fixed $25 for each year of service. The Legislators’ Retirement System was 70 percent funded and was on the same amortization schedule to pay off unfunded liabilities by 2024.

Laura B. Wallace, PERS Investment Officer, spoke on the investment programs currently in place. Two portfolios were managed, she said, one for the PERS fund and one for the legislators’ pension fund. Citing Exhibit C, page 14, she pointed out that total assets in the PERS fund were just under $12 billion with five asset classes, and $4 million in the legislators’ fund with investments in two asset classes. She mentioned the volatility of the stock market in the past years, and discussed the difference between actual and market performance (page 17, Exhibit C).

Mr. Pyne then referred to the 1999 priorities of PERS (Exhibit D). PERS requested a Joint Resolution urging Congress to oppose extension of Social Security coverage to newly hired state and local government employees, citing that Congress was considering the measure in order to shore up the financial woes of the Social Security System. He felt that mandatory coverage of state and local government employees under Social Security would disrupt the PERS benefit structure. PERS, he said, had no plans for a fiscal bill for 1999, and said that contribution rates would remain the same. Some minor cost elements, however, were included in a technical bill, the details of which were in Exhibit D. Those included provisions to allow rollovers, increase benefits for certain survivor benefit recipients, enroll gaming commissioners in PERS, remove certain remarriage restrictions from the retirement law, treat certain local government service as regular service for computing pension benefits, and some modifications to re-employed retiree benefits. S.B. 36 of the 1997 Legislative Session, directed PERS to conduct a study on funding a judges’ retirement plan, not administered by PERS, and which was funded on a pay-as-you-go basis. That study was also included in the proposed PERS technical bill.

Chairman Bache asked for questions from the committee. In response to a question from Assemblywoman Segerblom on the retirement system source of rollovers, Mr. Pyne replied that only Individual Retirement Accounts (IRAs) or 401K plans would be used for rollovers. He said he hoped Congress would pass legislation to allow purchase of service by rolling over deferred compensation money or teacher annuity account money (403Bs), but at present, deferred compensation funds could be rolled over only into IRAs or 401Ks.

Assemblywoman Von Tobel then asked Ms. Wallace if tobacco companies were in the PERS fund portfolio. Ms. Wallace responded that about $40 million was invested in tobacco companies. Citing the recent settlement when the State of Nevada sued the tobacco companies, and the fact that tobacco stocks were obviously affected by that settlement, Assemblywoman Von Tobel questioned why the retirement plan would invest in tobacco. "Our duty as fiduciaries is to invest exclusively for the sole benefit of our members and benefit recipients," Ms. Wallace replied. She said that financial obligation gave plan managers full discretion to invest in investments that would provide the best return for members and beneficiaries.

Ms. Wallace went on to explain that, given the litigation, tobacco stock companies oftentimes have other lines of business and that on balance, the plan managers felt there was investment value to that company as a whole.

Assemblyman Neighbors asked about the volatility of the stock market. Mr. Pyne responded that the plan had been achieving a very good return on its investments, especially during the 1980’s and 1990’s. He did not feel that the current short-term market volatility would have long-term effects. "Over time, history tells us the stock market is going to generate good returns, and that is pretty much our philosophy," he said.

Assemblyman Neighbors asked if a member of the Legislators’ Retirement plan who served only three sessions and received a refund of his or her contributions would receive interest. Mr. Pyne replied only contributions were refunded.

Ms. Wallace, responding to a question from Assemblywoman Berman, discussed investments in Real Estate Investment Trusts (REITs). Of the $1 billion currently invested in real estate, about $20 million was in real estate stocks, and those were used as an alternative to cash. Assemblywoman Berman pointed out, from page 14 of Exhibit C, that 10 percent was invested in real estate stocks, not pure real estate. Ms. Wallace explained the 10 percent reflected real estate, but from time to time some REIT stocks would be represented. She emphasized that real estate represented land. About $1 billion (99 percent) was invested in land, and the total REIT assets were very small.

Assemblywoman Berman questioned Ms. Wallace about management fees paid for trading. Ms. Wallace responded the management fees were institutionally competitive, and that while bids for management fees were not put out on a yearly basis, those contracts, by law, were open-ended. They could be terminated at any time, obviously for performance reasons. Fees, she continued, were negotiated in advance of the relationship and, she felt, were reasonably competitive.

Chairman Bache then inquired if, with the passage in 1996 of the term limits measure, limiting the years of membership in the Legislative Retirement System would have an adverse affect on its portfolio and its funding.

Mr. Pyne replied in the affirmative. He indicated that information had been relayed to the plan’s actuary, and a report had been made in June 1998 to the Legislative Interim Retirement Committee addressing that issue.

Chairman Bache recessed the committee at 9:15 a.m. The committee reconvened at 9:25 a.m.

Chairman Bache opened the hearing on A.B. 44.

Assemblyman Morse Arberry, Chairman, Ways and Means Committee, testified

in favor of A.B. 44. He discussed the three scenarios under which a PERS participant was eligible for immediate retirement benefits, pointing out the existing law which provided a retirement benefit of 2.5 percent of the average of the employee’s highest salary over a 36-month period times the years of service. A.B. 44 would, he said, add one other scenario to the list of situations regarding retirement eligibility. This would provide a person with at least 5 years of service retirement eligibility when the sum of his age and years of service equaled 75 or more.

Assemblyman Arberry indicated the provisions of A.B. 44 would serve as a major incentive for younger employees in the public sector to continue employment with the state or other public agencies. He cited the example of the person coming to work for the state at the age of 29, having had good work experience with three previous employers, could elect to work for the state for 23 years and retire at age 52, with a 57.5 percent benefit. Mr. Arberry reiterated even though a cost of living increase for public employees was questionable, A.B. 44 represented a very positive action for that group of dedicated employees. He said even though the state was on a tight budget, it was trying to come up with ideas and mechanisms to give state employees an incentive to let them know their well-being was of prime consideration.

Assemblyman Arberry concluded by saying when a person had showed dedication to a system, through good times and bad, and was told there was no money in the budget for cost of living increases, he deserved to be rewarded for his years of service by being allowed to retire at age 52.

Assemblyman Thomas provided a spreadsheet (Exhibit E) which tabulated the various scenarios for retirement under the provisions of A.B. 44.

Assemblyman Mortenson asked if the provisions would put a strain on the PERS system. Mr. Arberry responded the PERS staff could best address that concern, but he tended to disagree there would be too severe an impact on the system. There would be some cost, he said, but it would not break the system.

Assemblywoman Gibbons inquired what would happen should a state employee retire at age 52, work in the private sector, and return at age 60. Would he or she be entitled to another retirement?

Chairman Bache addressed Assemblywoman Gibbons’ question by indicating that when a state employee retired for a second time, a process was in place for computing new benefits based on two separate times of service.

Assemblywoman Von Tobel wondered about employees who had retired under the old rules and could not benefit from the new laws. Mr. Arberry replied that Ms. Von Tobel’s question was an excellent one and that he would have the Research Division look into it.

Mr. Pyne spoke against A.B. 44. He read from a prepared statement (Exhibit F). PERS was opposed to the bill for two reasons: (1) Allowing individuals to retire at an earlier age with less service credit did not constitute good public policy; and (2) there would be significant cost associated with this measure. He addressed the first point by stating that allowing public employees to retire at the top of their careers in terms of performance and knowledge did not constitute a wise interpretation of NRS 286.015, the Public Employees’ Retirement Act. NRS 286.015 was designed around retaining career employees so public employers and the public could benefit from their training and experience. Mr. Pyne estimated a percentage of payroll cost for regular members in the range of 2 to 3 percent, which translated to a dollar cost of between $44 million and $66 million in the first year of enactment of A.B. 44. Employers and employees would share this equally.

Chairman Bache observed that for police and firemen the only group to be affected would be the group between 46 and 48 years of age. He asked if the numbers were different for police and firemen than for regular employees. Mr. Pyne responded that, as he saw it, A.B. 44 did not address police and firemen.

Chairman Bache wondered by what percentage contribution rates would have to be raised in order to cover the provisions of A.B. 44.

Mr. Pyne estimated 2 to 3 percent. Earlier retirement, he said, created an unfunded liability. He objected to early retirees who would reap benefits and that the employees who remained in the system would end up paying for those benefits. "This is a very expensive group of people," he said.

Assemblywoman Gibbons asked if Mr. Pyne had gotten feedback from employees themselves. She asked how the plan compared to most private sector employers. Mr. Pyne could not comment on the private sector, but indicated there were variable aging service rules. He said that while no formal surveys had been conducted with public employees, people with whom he had spoken realized there would be associated costs. "They know there’s no such thing as a free lunch if you’re going to provide somebody with early retirement."

After further discussion, Chairman Bache closed the hearing on A.B. 44. He called the committee’s attention to a letter from the Douglas County Board of County Commissioners (Exhibit G), signed by Daniel C. Holler, County Manager. The Board expressed its opposition to A.B. 44.

Chairman Bache then introduced a Bill Draft Request (BDR) that had come in during the meeting.

BDR 23-36 – Authorizes collective bargaining for certain state employees (A.B. 131)

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Assemblywoman Von Tobel said that she and Assemblywoman Parnell had discussed the first day’s hearing on the state employees’ insurance plan. She and Ms. Parnell felt it would be a prudent move if the committee would request a "Letter of Intent" asking for another open enrollment period in the insurance plan. She expressed concern that last October the state employees were not fully aware of the ramifications of the plan. She felt that, given an additional open enrollment prior to this October, employees would have the opportunity to fully apprise themselves of the advantages and disadvantages of the four plans and make educated decisions.

Chairman Bache asked for discussion and if the committee wished him to write a letter to the Committee on Benefits (NRS 287.041). Several members of the committee opined they would indeed like to see the information that was received by state employees prior to the open enrollment period in October 1998.

Chairman Bache directed Committee Policy Analyst David Ziegler to provide the committee with the requested information.

There being no further business to come before the committee, the meeting adjourned at 9:57 a.m.

RESPECTFULLY SUBMITTED:

Charlotte Tucker,

Committee Secretary

APPROVED BY:

Assemblyman Douglas Bache, Chairman

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