Over the last year, it has been reported that the state’s two major pension funds, the Public Employees Retirement Association (PERA) and the Educational Retirement Board (ERB), are in serious financial trouble because of long term liabilities of benefits to paid retirees in the future will exceed literally by the billions the funds that are available.
The Public Employees Retirement Association (PERA) is the legislative created and state regulated retirement association for all government employees. PERA pays pensions to more than 40,000 retirees and also has a public employee plan for about 49,000 active members. PERA administers the pension funds for active, inactive, and retired public employees in New Mexico, and includes state, county and municipal plans, firefighters, police officers, blue collar workers and various municipal plans. PERA has an Executive Board duly elected by the members of the Association.
The financial problems PERA is experiencing can be directly related to the type of pensions offered to government employees as well as what many PERA retirees feel has been mismanagement of the pension funds.
Public school teacher and employee retirement and pension funds are separate and not managed PERA but by Education Retirement Board (ERB). ERB consists of a Board of Trustees who manage the pension funds and the investment portfolio.
DEFINED CONTRIBUTION PLANS
A “defined contribution” plan is a type of retirement plan where employers, employees, or both regularly make contributions to the plan and future employee retirement benefits are based on the dollar amount of contributions made and the final value based on “investment growth”. A defined contribution plan does not guarantee a specific benefit to be paid in the future. With a defined contribution plan, individual employees assume all of the investment risk involved.
The most common type of defined contribution plan is the 401(k), where employees contribute a portion of their earnings and invest their money so it grows over time. In the private sector, it is common with defined contribution plans for employers to offer to match a portion of employee contributions, but most of the burden of funding 401(k)s falls at the individual employee level.
With defined contribution plans, most associated administration fees are passed on to the employees who participate.
PERA PLANS ARE DEFINED BENEFIT PLANS
Most if not all of PERA’s pension plans it administers are “defined benefit” plans as opposed to “defined contribution” plans. With a “defined benefit plan”, the state, county or municipality government entity promises the government employees a specific payout upon retirement and guaranteed for life. Further, a person can designate a spouse as a beneficiary and the spouse can be paid the pension for the rest of their life. The pension payout is based on a formula that accounts for factors such as length of service, age, and earnings history.With a defined benefit plan, PERA is responsible for making sure there’s enough money to pay employee benefits as scheduled, and PERA assumes all of the investment risk involved in the plan.
Under the PERA system, the formula used for a very large portion of retirees is 25 years of total service multiplied by 3 for each year of service applied to the average high 3 years of pay. A person’s age can also allow a person to retire before the age of 67, but it reduces the benefits where the total years of service is less than 25 years.
(EXAMPLE: Government employee works a full 25 years and is paid an average of $50,000 each year of last 3 years of service. A multiplier of 3% is given each year of service or 75% of high three average yearly pay of $50,000 = $37,500 pension)
Law enforcement officers do have a separate retirement formula and can retire with 25 years of service and can be paid 90% of their high 3 pay. All of the PERA pensions are funded by government employer contributions usually matching the employee contributing a portion of their earnings. Defined benefit plans are considered riskier for employers and they are more expensive to maintain. For this reasons, defined benefit plans have become far less popular in the private sector.
In 1998, 60% of Fortune 500 companies offered defined benefit plans to new hires, but by the end of 2013, that number fell to just 24%. This absence of defined benefit plans has left more and more employees in a less secure spot financially with regard to retirement.
Under the PERA Pension plans, retirees have been given cost of living raises (COLA) that have been anywhere from 2% to 3% over the years and were considered guaranteed and paid after a few years in retirement. The 2019 New Mexico Legislature is considering legislation that would eliminate all cost of living adjustments or suspend the COLA for a period of years.
PERA MANAGEMENT UNDER SCRUTINY
Wayne Propst is the executive director of the state’s Public Employees Retirement Association (PERA). In 2018, Propst gave his staff more than $600,000 in salary increases without PERA board approval. The raises were given at the same time that PERA management and the PERA Board were pushing to eliminate annual cost-of-living (COLA) increases to PERA retirees. The money for the management raises come directly out of PERA’s investment funds, or funds that should have gone to retirees. At a recent meeting of the PERA’s board of directors, the PERA board voted to ask New Mexico Attorney General Hector Balderas to investigate huge raises that Propst gave himself and his subordinates at the agency over the past 5 years without PERA Board approval. The board also voted to remove Propst of his authority to hand out promotions and raises to PERA employees while the AG’s investigation is conducted.
New Mexico State Treasurer Tim Eichenberg, who is also a member of the PERA board, independently has asked the AG’s office to investigate “possible illegal actions” by Propst.
Harvey Leiderman, the PERA’s board’s fiduciary attorney told the board members that they basically don’t know what they are doing on several levels relating to internal governance. Leiderman told the board that they have no idea of what authority they have or haven’t given to Propst, over the years when it comes to his authority to give out raises and promotions to PERA staff.
New Mexico State Auditor Brian Colón has also launched an investigation into Propst and the pay raises and promotions he has handed out. The issue is whether Propst has the authority under state law and PERA rules and policies to give those raises without PERA Board approval.
IMPLODING RETIREMENT FUNDS
At the last meeting of the PERA board, Chief Investment Officer, Dominic Garcia, reported that PERA’s investment funds suffered a 2.5 percent loss in 2018. In comparison, the teacher ERB retirement fund earned 6 percent return during 2018. The PERA fund fell to $14.6 billion from $15 billion. Both retirement systems have asked for a one-time infusion of funds, but the New Mexico legislature has resisted it as not being a truly viable solution to the projected insolvency of the retirement plans.
In 2013, the New Mexico legislature tackled pension reform but the changes made have not been enough to make the pensions fully solvent. A shrinking government workforce as a result of government cuts and a sluggish economy over the last 8 years has dragged down New Mexico’s largest pension program. It is estimated that between 4,000 and 5,000 state government employee vacancies and eliminated positions have occured over the last 8 years resulting in fewer employee and employer contributions made to the funds and effective solvency. Another factor contributing to insolvency is that people are living much longer and are collecting their pensions for longer periods of time.
Despite changes enacted in 2013, PERA’s estimated unfunded liability which is the gap between future retirement benefits owed and expected future assets on hand, has increased over the past four years to $4.8 billion from $4.6 billion. Decreases in the ERB’s expected investment returns and inflation calculations have caused the system’s unfunded liability to rise to $7.4 billion, an increase of more than $1 billion since 2014 and its funded ratio to drop to 61.5 percent.
The ERB pension fund is not expected to reach 100 percent funded status for 84 years or until the year 2100.
Governor Michelle Lujan Grisham proposed budget seeks to shore up New Mexico’s two major pension funds by increasing how much the state pays into workers’ retirement accounts with $13.7 million in funding. The Governor’s nor the legislature’s budget plans thus far do not call for any additional lump sum payment into either the ERB or the PERA funds.
COMMENTARY AND ANALYSIS
The elimination or suspension of the Cost of Living Adjustment (COLA) by the New Mexico legislature is a very bad idea and nothing more than a band aid approach to a very serious problem. Elimination or suspension of the COLA would be a betrayal of government employees who have worked over the years and in good faith made their contributions. All too often private sector employees and candidates for office and the media vilify and express contempt for government employees because of the pensions they are paid, pensions they have earned. Six years ago, New Mexico legislature tackled pension reform but the changes made have not been enough to make the pensions fully solvent.
Governor Michelle Lujan Grisham and New Mexico legislature have a looming financial crisis that needs to be resolved sooner rather than later. While the State is experiencing a windfall in increased revenues, the New Mexico Legislature should use the opportunity to increase funding to the PERA funds significantly more than the $13 million being proposed, but such an expenditure is not going to be a long-term solution but the beginning of it.
The New Mexico Legislature needs to consider pension reform measures once again but during a special session where a solution can be hammered out without the distractions of a general session.
It is likely the New Mexico legislature will need to consider pension reform in the form of including “defined contribution plans” in one form or another for future government employees, increasing employer and employee contribution plans under the defined benefit plans or modifying the multipliers and increasing years of service or age before retirement.
The PERA Board itself needs to take far more aggressive action and get its own management under control and financial investments need to have much better returns on investments. PERA management staff are paid lucrative salaries for their services and they need to show results in the investments with much higher returns or the PERA Board needs to find people who can do a better job.
It has been reported that Governor Michelle Lujan Grisham announced a “solvency task force” for PERA.
The 19-member task force created by Lujan Grisham will include PERA officials, labor union leaders, retiree representatives and others. It will be tasked with providing recommendations to the governor by August 30, 2019. The task force will make recommendations on contributions and payouts and a plan will be pitched during the legislative session next year.
What is in fact needed is a special session the sooner the better to deal with pension reform measures that will work.
Ultimately, the lives of 90,000 New Mexicans and their families, currently employed or retired, will be affected by the decisions made with the PERA system.