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 manages a $15 billion pension fund.
PERA administers the pension funds for active, inactive, and retired public employees in New Mexico. PERA 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.
Over the last few years, 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.
TARGET INVESTMENT RETURNS DOWN
In May, financial experts warned New Mexico officials to prepare for the possibility of poor investment returns or other circumstances that could damage the pension systems further.
On June 12, 2019, the New Mexico Legislature’s Investments and Pensions Oversight Committee were warned that PERA is not on track to hit the target for investment returns this year. PERA’S goal is to reach 100% funding of liabilities by 2043.
PERA Executive Director Wayne Propst told the committee that PERA thus far this year is missing the investment target by 2.25% points. Further, the committee was told that investment gains this year might come in at 3% to 5% and not the standard 7.25% target used by many pension plans throughout the United States.
The committee was warned it could have a serious impact on the long-term financial projection for PERA. According to Propst, a 5% return would be enough to reduce the projected funding ratio in 2043 from 74% to 69%. The challenge, Propst said, isn’t unique to PERA and he said:
“This has been a very volatile year in the markets for public pension plans across the country.”
POTENTIAL SOURCE TO SHORE UP SAGGING PENSION RETURNS
On June 16, 2017, State Senate Finance Committee Chairman John Author Smith told an interim legislative committee that if the price of oil does not change drastically, the State could once again receive between $1.1 billion to $1.3 billion in additional tax dollars next year. If that happens, it will be the second year in a row that the state will get a $1 billion plus windfall. The oil boom in Southern New Mexico is going strong and royalties paid to the state continue to increase. The additional revenues could be relied upon to invest more in the PERA and ERB pension funds to make sure they become 100% solvent.
GOVERNOR’S PERA SOLVENCY TASK FORCE
Financial warnings to the New Mexico Legislature’s Investments and Pensions Oversight Committee come as a task force established by Governor Michelle Lujan Grisham works on recommendations to improve the financial health of PERA.
Governor Michelle Lujan Grisham announced a “solvency task force” for PERA. The 19-member task force includes PERA officials, labor union leaders, retiree representatives and others. The committee is 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 presented to the 2020 New Mexico legislative session.
PERA’s Board Chair, Jacquelin Kohlasch, along with Executive Director Wayne Propst and Chief Investment Officer Dominic Garcia serve as Task Force members.
Other Task Force members include a representative from the following entities:
New Mexico House of Representatives
New Mexico State Senate
New Mexico Investments & Pensions Oversight Committee
Retired Public Employees of New Mexico
Fraternal Order of Police
National Association of Police Organizations
New Mexico State Police Association
New Mexico Sheriffs’ Association
New Mexico Professional Fire Fighters Association
Albuquerque Fire Department Retirees’ Association
American Federation of State County & Municipal Employees
Communication Workers of America
New Mexico Counties
New Mexico Municipal League
IMPLODING RETIREMENT FUNDS
In a February 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 from $15 billion to $14.6 billion.
Both PERA and ERB retirement systems requested a one-time infusion of funds during the 2019 New Mexico legislative session, but the legislature 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. 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 occurred 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 from $4.6 billion to $4.8 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.
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 have a separate retirement formula and can retire with 25 years of service and can be paid 90% of their high 3 years of 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. During the 2019 New Mexico Legislative session that ended on March 15, 2019, the legislature considered legislation that would have eliminated all cost of living adjustments or suspend the COLA for a period of years, but the legislation failed.
Governor Michelle Lujan Grisham’s 2019- 2020 approved budget attempted 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.
COMMENTARY AND ANALYSIS
There are 6 representatives from public safety out of 16 on the Governor’s PERA Solvency Task Force: the Fraternal Order of Police, National Association of Police Organizations, New Mexico State Police Association, New Mexico Sheriffs’ Association, New Mexico Professional Fire Fighters Association, Albuquerque Fire Department Retirees’ Association. The Governor’s PERA Solvency Task force is very top heavy with public safety representatives. The Chair of the Task Force is the former President of the Albuquerque Fire Fighters union who has retired from the Albuquerque Fire Department. Public Safety retirees have far more lucrative retirement benefits when it comes to years of service required to retire and the amount of pension benefits that they will paid once retired.
The fact that PERA’s Board Chair, Jacquelin Kohlasch, along with Executive Director Wayne Propst and Chief Investment Officer Dominic Garcia serve as Task Force members is no consolation given the fact that all three are somewhat controversial with many retirees who have been highly critical of the management of the PERA funds. Executive Director Wayne Propst is currently being investigated by the New Mexico Attorney General for improprieties of giving himself a raise along with many of his staff without PERA Board approval. The Attorney General has yet to announce if there was anything improper about the raises.
There are 40,000 PERA retirees and the overwhelming majority of those retirees are not public safety retirees. The Governor needs to increase the representation on the PERA Solvency Task Force Task Force with far more voting members that are at least equal, and preferably more, to the public safety representatives from other retirement sectors of the PERA system, including blue collar and white-collar employees that have retired. Otherwise, serious doubts will be raised by the majority of the stakeholder retirees that they were not fairly and equitably represented when it comes to any changes in the PERA benefits and that public safety representatives will protect their own benefits over other retirees.
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).
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 approved being, 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.
What is 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 pension system.