News

from May 14, 2015

Advice Goddess

Taxpayer alert

Since the 1960s, legislative measures to increase criminal penalties, make parole more difficult to obtain, and create new crimes have been popular with politicians in the Nevada Legislature. The result has been a very high Nevada incarceration rate and one of the nation’s most expensive criminal justice systems, according to intermittent reports, including some from the U.S. Department of Justice.

The current Nevada Legislature is no exception. According to a report released May 11 by the American Civil Liberties Union of Nevada, 44 “get tough” bills are pending in Carson City. Though the report does not provide a cumulative figure for the cost of all the measures, some of them bear fiscal notes outlining the costs that would be incurred if they are enacted.

Tough-on-crime bills drove prison construction costs so much at one point that, in the late 1980s and early 1990s, the two house judiciary committees required a cumulative assessment of all such bills each session before any of them were allowed to the full houses for votes. They also prevailed on legislators to cool the get-tough rhetoric and pursued, with the cooperation of prison officials, less expensive alternatives, particularly for nonviolent offenders. The result, according to former Assembly Judiciary chair Robert Sader, was that the state avoided having to build one new prison as the incarceration rate slowed.

But cumulative assessment fell by the wayside with turnover in the legislature and criminal justice costs started climbing again.

Assemblymember Michele Fiori has one bill that goes the other way—Assembly Bill 281, which would treat some traffic offenses civilly instead of criminally. It was amended into a study of the idea, passed the Assembly and is awaiting action in the Senate. But that is an exception to most criminal justice bills.

The ACLU report can be read at http://tinyurl.com/mexxpf2.

The Un-Tesla gets a workout

In an English-challenged statement two years ago, Tesla CEO Elon Musk had this to say about hydrogen-powered cars: “And then they’ll say certain technologies like fuel cell—oh, god—fuel cell is so bullshit, except in a rocket.” He also called them “extremely silly.”

This week, Washington Post automotive writers published their assessment after a test drive of Toyota’s hydrogen prototype, the Mirai: “The Mirai is responsive, futuristic, fully featured and fun to drive, the kind of car you can see beating gas guzzlers at their own game. … With a 300-mile range, it leaves Tesla’s Model S in the (clean, zero-emission) dust.”

The Mirai is expected to go on the market later this year, but it will be a slow, gradual launch in California and a few other states as hydrogen fueling stations (now in just three states) and other problems are dealt with.

The view from D.C.

Capitol Hill in Washington, D.C., has its own newspaper, Roll Call, and it has been keeping track of the musical chairs surrounding Nevada’s U.S. Senate seat since Harry Reid bowed out of the 2016 race.

“The Republican field has been slow to develop, in part because the focus has been on [Nevada’s] legislative session,” Roll Call reported this week in a piece on possible GOP contenders. As befits a D.C. newspaper, it took notice particularly of a U.S. House member, Joe Heck.

“He has had proven success winning in the competitive 3rd [House] district, pulling off a 7-point victory in 2012, even as President Barack Obama won the swing territory by 1 percent. Heck would also start off with a financial advantage, having finished the first quarter with $920,000 in his campaign account.”

For reasons generally ranging from reluctance to lack of gravitas, Roll Call generally counts out of the running Brian Sandoval, Brian Krolicki, Bob Beers (the only announced candidate) and Mark Hutchison.

—Dennis Myers

Retirement games

Workers resist new system

An effort to fundamentally change the state worker pension system has fierce by ideological support in the Nevada Dennis Myers Legislature but is facing equally fierce opposition. Washoe Republican Assemblymember Randy Kirner said his Assembly Bill 190 deals with the unfunded liabilities of the Public Employees Retirement System (PERS). But it goes well beyond that, undertaking changes that are not needed to solve the funding. Those changes would likely result in smaller pensions for state workers.

“This is really a math problem.”

Assemblymember Randy Kirner Washoe County Republican

Kirner’s original effort was Assembly Bill 3, which was killed in committee in February. But he did not give up, coming back with A.B. 190. It provides for what Kirner calls a hybrid 401(k) plan. It would continue current workers on the existing traditional pension plan but would shift incoming employees to a defined contribution plan, akin to a 401(k).

In a defined contribution plan like a 401(k), the employer, worker, or both contribute regularly to a personal account in the worker’s name. Earnings from investments chosen by the worker from a menu of several options also go into the account.

In a defined benefit plan like Nevada’s PERS system, a worker is assured of a specified amount monthly after retirement, determined by her earnings, length of service and age. Though such plans are paid for in part by investments made by the plan’s money managers, the worker’s monthly payment is not affected by the returns on those investments.

PERS has offered an estimate of $790 million in increased contribution rates the first year, plus $18 million in changeover costs if Kirner’s bill is enacted. And PERS officials say the unfunded liability problem is already being solved under an existing plan.

Kirner is skeptical of those numbers. He says that over a decade, the state went from four active employees per retiree to two.

His critics say that defined or deferred contributions and unfunded liabilities are two different issues, and that Kirner is trying to piggyback a new retirement plan on the unfunded liabilities issue. He disagrees, telling one hearing, “This is really a math problem.”

Studies of PERS have generally been positive on the way it is run and the investment returns. When asked about those studies in a committee hearing, Kirner said, “In some respects, it doesn’t matter what that return on investment is.”

Kirner’s GOP colleague, Pat Hickey, has spoken up for 190. “We are not talking about ending PERS as we know it, but saving a public employees retirement system as we’re going to need it in the future,” he said.

Assemblymember Randy Kirner, sponsor of changes in the state retirement system, chats outside the Assembly hall with Assm. Pat Hickey, center, and lobbyist Pete Ernaut, right.

The Nebraska case

After the 401(k) as we now know it was authorized by a 1978 congressional enactment, mutual fund managers got dollar signs in their eyes at the size of the market before them. Soon employers all over the nation were selling it to their workers without any idea of whether it would be better or worse for those workers. Many of them still don’t.

Shifts from traditional pension plans to self-investor plans are always sold as empowering wage-earners. “If you are a younger worker, I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future,” said candidate George W. Bush in trying to sell his program for Social Security.

But the evidence indicates that everyday people simply don’t have the know-how for investing that the professional money managers of traditional pension plans have, and that they don’t earn as high returns. So the politicians’ empowerment is the workers’ cut in retirement income.

In 1964—long before Wall Street got interested in foisting 401(k)s on the nation—Nebraska permitted state workers to leave its traditional pension system and instead invest in a defined-contribution plan.

In 2000, an analysis determined that Nebraska’s traditional defined benefit plan had earned average returns of 11 percent. Workers in deferred benefit plans earned returns of 6 to 7 percent.

This was no minor study. It provided the results of a whopping 38 years of experience in both systems.

“The point is that the professional money manager [of the state system] had a better return than what the individual participant could realize by his own allocation of assets,” said Anna Sullivan, executive director of the Nebraska retirement system.

The investment website The Street observed in 2002 that Nebraska “offers an illuminating case study in the risks of giving investing responsibilities to workers. Forty years of lousy returns, under the best of conditions, don’t speak well for 401(k)s.”

Nebraska didn’t just turn its workers loose in the stock market. It gave them day-long instructional workshops on investing in 11 options.

But the workers either did not have the time or did not have the interest in investing. Half of them did not make a choice, which meant they went into a default option.

Nor is weak-investing skill the only failing of 401(k)-style plans. “On a personal level, the main reason average Americans do poorly with 401(k) plans is that they don’t invest enough, largely because they have no practical idea of how much they will need for their retirement years,” wrote Hedrick Smith in his book Who Stole the American Dream? “Typically, people underestimate their longevity and how many more people are living into their 80s and 90s. Long life is the upside. The downside is the money it takes to pay for all those extra years.”

Moreover, Smith wrote, “The best-educated, best-paid employees and executives were getting investment returns that were six or seven times greater than the returns for average workers. That gap was compounded year after year.”

But politicians are unlikely to tell members of the public that they are lousy investors.

Many of the Republicans’ assumptions for what they call pension “reform” have foundered on contrary facts. Kirner said his plan offers more portability—workers able to take some of their money with them to their next jobs—because workers are now more mobile and rarely spend a career at one job as they once did. But the U.S. Bureau of Labor Statistics says the percentage of people of retirement age (65 years and older) who have stayed at one job for 10 years or more grew from 48.7 percent to 55 percent over the last 10 years. People are becoming more stable in their jobs, not less. Younger workers, too, are staying at jobs longer than they used to. In addition, portability can be dealt with without going to deferred contributions.

However, Kirner draws attention to the specific case of teachers in Nevada. “Many of them don’t last over five years,” he said.

Kirner also scoffs at the notion that PERS can earn 8 percent, calling it “nuts.” But such returns are routine in state government pension plans, including Nevada’s, which has posted an average annual return of 9.6 percent, according to PERS executive officer Tina Leiss.

In proposing such a shift, Kirner is in all likelihood proposing that state workers retire with a smaller nest egg. Little wonder they have balked at the legislation. Ω