On February 19, 2019, Governor Michelle Lujan Grisham announced a “solvency task force” for the Public Employee Retirement Association (PERA) pension program. The 19-member task force included PERA officials, labor union leaders, retiree representatives and others. The committee was tasked with providing recommendations to Governor Lujan Grisham by August 30, 2019. The task force was to make recommendations on contributions and payouts with a plan to be presented to the 2020 New Mexico legislative session to reform the PERA retirement system.
GOVERNOR’S PERA SOLVENCY TASK FORCE PRELIMINARY RECOMMENDATIONS
On August 8 , 2019, the Solvency Task Force released its recommendations to eliminate the $6 billion unfunded liability in New Mexico’s pension system for municipal, county and state workers known as the Public Employees Retirement Association commonly referred to as PERA.
Following are the PERA Solvency Task Force Preliminary Recommendations as released by the Governor’ s Deputy Chief of Staff Diego Arecon who chairs the Task Force:
“• Fulfill the requirements of Governor Michelle Lujan Grisham’s January Executive Order including placing PERA on a path to pay off its $6 billion unfunded liability by the year 2043.
• Provide for sustainable, “profit sharing” Cost of Living Adjustments for current and future PERA retirees based on investment returns and funded ratio.
• Guarantee a minimum COLA of 0.5% and a maximum COLA of 3% based on investment returns/funded ratio. Once PERA achieves full funding of 100% the maximum COLA increases to 5%.
• Begin to address disparity in funding levels among PERA Divisions by exempting State Police and Adult Correctional Officers from proposed contribution increases.
• Protect lower income employees and retirees by exempting employees making less than $25,000 from proposed contribution increases and providing a 2.5% COLA to retirees with pensions of less than $25,000 and 25 years of service to include disability retirees.
• Result in an immediate $700 million reduction in PERA’s unfunded liability.
• Replace prior PERA proposals to freeze COLAs for 3 years with a 2%, simple COLA, pausing only the compounding factor, to be paid annually for the next 3 fiscal years. Simple COLAs will be paid for by a one-time appropriation of $76 million. PERA will administer a 13th check to retirees annually for 3 consecutive years.
• Provide incentives for employees to continue working by removing the cap on earning service credit.
• Eliminate the current 7 year wait to receive a COLA upon retirement and restore it with the 2-year calendar period.”
PERA PENSION PROGRAM SERIOUSLY UNDERFUNDED
PERA is the legislative created and state regulated retirement association for all state, county and municipal government employees. PERA pays pensions to more than 40,000 retirees and also has about 50,000 active members who are working and paying into the system. There are 5 major PERA Pension Plans administered by PERA: State Employees General, State Police and Corrections, Municipal Employees General, Municipal Police and Municipal Fire. The pension plans cover state police, firefighters, judges, prosecutors, public defenders and many, many more state, city and county government employees. PERA manages a $15 billion pension fund and investment income helps pay pensions owed.
The educator retirement system, known as ERB is separate from PERA and has more than 59,000 active employees and roughly 47,000 retirees.
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. Unfunded liability represents the difference between assets on hand and future retirement benefits owed. PERA Executive Director Wayne Propst told the legislative 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%.
During the 2018 election, candidates for Governor Democrat Michelle Lujan Grisham and Republican Steve Pierce had major differences on how to deal with PERA. You can read more about the differences at this link:
TASK FORCE PROPOSALS
At the August 8, 2019, the Solvency Task Force recommendations were elaborated on as follows:
REQUIRING PUBLIC EMPLOYEES AND THE AGENCIES THEY WORK FOR TO PAY MORE INTO THE RETIREMENT SYSTEM.
Under this recommendation most employees, especially new employees, would be required dedicate more of their paychecks to the retirement plan. Their employers would also be required to pay more. Employer and employees would pay an additional 2% of the employees’ salary, with the increased contributions phased in over four years. The recommendations do not contain how much the increased contributions would cost the state and local governments.
REDUCE THE COST-OF-LIVING ADJUSTMENTS AVAILABLE TO RETIREES OVER THE NEXT THREE YEARS.
For the next three years, the current 2% cost-of-living adjustment that retirees receive in their pensions would be suspended. Instead, a lump sum at the end of each year equal to 2% of their annual pension would be paid. According to the Task Force, this would save the PERA pension system money because it avoids the compounding effect, in which each 2% increase builds on the previous year’s 2%.
ABANDON THE ANNUAL 2% RAISES THAT RETIREES NOW GET IN THEIR PENSIONS AND INSTEAD ESTABLISH A PROFIT-SHARING MODEL.
After the first three years a move to a profit-sharing model for the annual cost-of-living adjustments would be made. The adjustment would generally fluctuate between 0.5% and 3% each year, depending on the performance of the retirement system’s investments and its overall financial health.
Under the proposals, low-income retirees, State Police officers and correctional officers would be exempt from some of the changes. No satisfactory justification was offered as to why State Police and correctional officers should be exempt from any changes.
100% FUNDED BY 2043
According to the Task Force, based on projections by actuaries working for the task force, the new pension system modifications eliminate the $6.1 billion unfunded liability within 25 years. Under the recommendations and based on the median projection by actuaries the funding ratio of the retirement would climb from the 70% this year to 100% in the year 2043.
PROJECTED IMPACT OF RECOMMENDATIONS
According to one news report, the financial impact of the recommendations would be:
A $700 million immediate reduction in pension plan’s unfunded liabilities if recommendations are approved by the legislature.
A $76 million one-time appropriation legislature would be asked to make to fund the cost-of-living adjustments in first three years.
It will take 34 years before the estimated year by which the pension system’s funded ratio would reach 100% or the year 2043.
The Task Force proposals are preliminary recommendations and are subject to approval by the New Mexico Legislature.
On August 8, 2019 dozens of retirees packed into a committee room at the Santa Fe State Capitol to listen to the PERA Task Force Presentation. Many retirees were highly critical and vocal of the proposals arguing that 6 years ago they had already given up some of their pension benefits in 2013 legislative session that dealt with pension reform. It was pointed out by the retiree speakers that retirees depend on their annual cost-of-living increases to keep up with inflation and other price increases. One retiree put it this way:
“To skim from the bottom of the pot, there’s nothing left. … We don’t make a lot of money. Please, leave our cost of living alone.”
Leandro Cordova, a former Taos County manager who now works for the New Mexico Association of Counties, who is also a member of the task force, said the recommendations for increased employee and employer contributions would reduce the take-home pay of employees and increase costs for taxpayers.
SUPPORT FOR THE PROPOSAL
A number of municipal firefighters said the recommendations are a reasonable way to keep the pension fund solvent. They noted that the pension benefits would be better, in some cases, under the recommendations. Retirees, for example, would have to wait only two years, not seven, to start receiving their annual cost-of-living adjustments. One argument made was if investments are strong and the health of the pension funds improves, the profit-sharing component of the proposal would boost the annual raises above the 2% retirees typically get now. Yet another argument made was that employees could also receive increased pension benefits, retiring at their full salary or more, if they worked long enough.
Senator George Muñoz, a Gallup Democrat and member of the task force, said lawmakers should proceed cautiously on the recommendations. One very and important critical point made by Senator Munoz is that it is unrealistic to expect investment returns alone to generate the revenue needed to turn around the pension system.
DEFINED CONTRIBUTION PLANS VERSUS DEFINED BENEFIT PLANS
A “defined contribution” pension 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.
A “defined benefit” pension plan is a type of retirement plan in which an employer promises a specified pension payment a month and for years. The amount paid to an employee is predetermined by a formula based on the employee’s earnings history, tenure of service and age. The defined pension plans usually also rely on investment income generated by contributors to the plan before a person retires.
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. The pension payout is based on a formula that accounts for factors such as length of service, age, and earnings history. With the “defined benefit plan”, the state, county or municipality government entity promises the government employees a specific payout upon retirement and guaranteed for life with cost of living adjustments made each year. Further, a PERA retiree can designate a spouse as a beneficiary and the spouse can be paid the pension for the rest of their life. 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 a person’s annual 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.
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.
PERA PENSION PLANS AND UNDERFUNDED PLANS IDENTIFIED IN 2017
There are 5 major PERA Pension Plans administered by PERA:
State Employees, General
State Police and Corrections
Municipal Employees, General
On April 27, 2017 a presentation was made to the PERA governing board on the current status of asset valuations and projected liabilities. The report includes 23 pie charts and graphs that reveals the current and projected status of the pension plans PERA administers and pending shortfalls. The pie charts disclose what will be paid into the pension programs by both government employers and employees, income from investments and what will be paid out in benefits from 2016 to 2046 with one chart projecting to 2066.
The link to the April 27, 2017 PERA presentation with all the graphs and pie charts is here:
A few of the pie charts and graphs in the presentation are worth highlighting:
The pie chart on page 7 reflects that on June 30, 2016 “Actuarial Accrued Liability” for PERA is $19,474,241,000.
The pie chart on page 12 reflects the present Value of Benefits as $21,951,183,972 managed by PERA and invested with a funding ratio of Assets to Accrued Liability of 75.3%. The goal is to have a 100% funded liability by 2046.
The graph on page 19 reflects the assets to pay expected benefits and Market Value of PERA Market Value with no contributions to have a Zero return in 2026.
The graph on page 18 provides projections PERA expected total benefit payments including current employees, future members and retirees.
The 2016 PERA Total Contribution Rates are reflected in a pie chart on page 20 as follows:
12.28% Employee Contribution Rate
3.61% Employer Normal Cost Contribution
11.67% Employer Unfunded Accrued Liability Amortization Rate
Significant funding shortfalls are reported on page 24 as being 7.99% of State General pensions and 13.87% for Municipal Fire Pension programs. The graph on page 25 reflects contribution shortfalls of State General and Municipal Fire up and until 2066.
COMMENTARY AND ANALYSIS
“Poking the bear” can be defined as provoking someone into becoming very angry and hostile and resulting in causing serious problems. In politics, it’s called “alienating your base” or core supporters to the point they campaign against you.
The PERA Governing Board meeting held last year at the CNM auditorium on University in Albuquerque during the general election race for Governor was packed with standing room only by very angry and very upset PERA retirees demanding explanations and information on the solvency of PERA pension system which was being reported as failing. The audience was extremely diverse. The audience was at times confrontational with the PERA Board members. Accusations of mismanagement of the funds were made. One PERA Board member took strong exception to the failure of the investment strategy of the funds returns and demanded more diversification of investment as just one means of reaching a 100% funding level.
Governor Lujan Grisham received a significant number of union endorsements, especially from state government unions such as AFSME. The Governor’s PERA Solvency Task Force has now “poked the bear” of 90,000 PERA contributors, retirees and their family members with their ill-advised recommendations.
Last year, candidate for Governor Michelle Lujan Grisham said she would oppose cuts to benefits, including any reduction in the annual inflation-related pension adjustments that retired state workers and teachers receive. According to a campaign spokesperson at the time:
“She does not believe that New Mexico needs to eliminate our defined benefit system for current or future educators and state employees and opposes any reduction in cost-of-living adjustments.”
There are 6 representatives from public safety out of 16 on the Governor’s PERA Solvency Task Force and include 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 Task Force Chair is the Governor’s Deputy Chief of Staff Diego Arencon and he is the former President of the Albuquerque Fire Fighters union who retired last year from the Albuquerque Fire Department.
Public Safety retirees such as police and fire have far more lucrative retirement benefits when it comes to less years of service required to retire and more pension benefits that they will be paid once retired. The vast majority of government employees were seriously under represented on the Task Force which caused significant amount of resentment.
It should come as no surprise that a number of firefighters appeared at the Solvency Task Force presentation in support of the changes. It is the municipal fire department pension plans that have the most serious problem with under funding pensions owed and the Chairman of the Task Force is a retired firefighter and union official.
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. Most if not all of PERA’s pension plans administered 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.
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.
One area where no recommendations were made is increasing the mandatory years of service beyond the 27 years to perhaps 30 or more years, and including public safety retirement years for firefighters and law enforcement. All of the PERA pension plans are State, County or Municipal plans funded by government employer contributions usually matching the employee contributing a portion of their earnings. Some of the plans have government contributions of 75% as opposed to 50%.
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. Reductions in the COLA has always been a major source of mistrust and hostility, if not contempt, by some 40,000 retirees.
Governor Michelle Lujan Grishman no doubt knows that the Task Force is “poking the bear” with upwards of 90,000 government employees each time PERA reform and the elimination of Cost of Living Adjustments (COLA) are advocated as a way of making the PERA fund solvent. Advocating the elimination of COLA adjustments will have serious political consequences simply because retirees vote. Hitting people in the pocket books who live on fixed income is one way to guarantee hostility at election time.
Governor Michelle Lujan Grisham and New Mexico legislature have a looming financial crisis that needs to be resolved sooner rather than later. The Task Force recommending major changes to the PERA system to wipe out its $6.1 billion unfunded liability over 25 years is dubious at best. A 25-year payoff on a $6.1 Billion-dollar debt which includes market returns on investment is unrealistic given the volatility of the markets.
Revenues from the oil and gas boom could in all likely reduce the $6.1 unfunded liability within a 5 to 10-year span. Such infusions of funding would no doubt benefit no less than 90,000 PERA workers not to mention their family’s over many more years. There is precedent for such expenditures. During the 2019 New Mexico Legislative session that ended on March 15, 2019, the legislature allocated $13 million to help shore up the PERA pension plan. 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 in the 2019 legislative session.
An option that should be considered is a restructuring pensions along the lines of what the Federal Social Security program does by taking into account a 35-year history of a person’s pay history and base pensions on the full employment history as opposed to paying a pension on a person’s high 3 years of pay. Social Security was never meant to be a retirement program but a supplemental program for about one third of a person’s retirement.
While there is still time before the 2020 legislative session, Governor Michelle Lujan Grisham should dissolve the current PERA Solvency Task Force, set aside it recommendations and create a working group with the New Mexico legislature, hire financial experts on pensions and investment strategies to come up with viable alternatives.
The New Mexico Legislature needs to consider pension reform during a special session where a solution can be hammered out without the distractions of a general session. The New Mexico legislature should consider pension reform in the form of including “defined contribution plans” in one form or another to be offered to future government employees, increasing employer and employee contribution plans under the defined benefit plans and modifying the multipliers and increasing years of service or age before retirement.
The Governor’s PERA Solvency Task Force has now “poked the bear” when it comes to their recommendations, especially on the Cost of Living Adjustments. It is going to be the New Mexico Legislature who will have to calm the bear down and find a final solution or suffer the consequences at election time.
The first thing that should be done is for the legislature to set aside the recommendations of the Pension Fund Task Force and find genuine outside experts in finance and pension funds to make recommendations to the legislature on what can and should be done to save PERA and to make it 100% fully funded within a short period of time.