On February 19, 2019 Governor Michelle Lujan Grisham signed Executive Order 2019-005 entitled “Creating a Public Employees Retirement Association Of New Mexico Solvency Task Force And Directing That The Task Force To Provide Certain Recommendations”. The 19-member task force included PERA officials, labor union leaders, retiree representatives and other stakeholders. The committee was tasked with providing recommendations to the Governor by August 30, 2019.
PERA’s Board Chair, Jacquelin Kohlasch, along with Executive Director Wayne Propst and Chief Investment Officer Dominic Garcia were appointed Task Force members.
The other Task Force members included 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
There were 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 Task Force was top heavy with public safety stake holders and union officials who have absolutely no background nor experience in economics, finance and pension plans. Yet they were tasked to come up with solutions to the pension programs no doubt following the leadership of the Task Force Chair.
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. There are 40,000 PERA retirees and the overwhelming majority of those retirees are not public safety retirees and their pensions are significantly less than public safety retirees.
GOVERNOR’S EXECUTIVE ORDERS ON TASK FORCE RECOMMENDATIONS
The Governor’s Executive Order was very specific and stated:
“5. The recommendations provided by the PERA Solvency Task Force must meet the following requirements:
a. They must result in an actuarial certified projection that, as of July 1, 2019, the Unfunded Actuarial Accrued Liability of the PERA Public Employees Plan will be amortized with no longer than a twenty-five-year period using an assumed investment rate of 7.25%.
b. They must include recommended employer and employee contribution levels and benefit modifications that are actuarily sound, preserve the defined-benefit retirement offered by PERA, and ensure intergenerational equity for current and future PERA retirees and other members.
c. They must consider the funded levels of the Divisions within the PERA Public Employees Plan.
6. The PERA Solvency Task Force may also consider and make recommendations on the governance structure on PERA, including but not limited to, the composition of the PERA Board of Trustees and other recommendations related [to] the administration of PERA.”
THE GOVERNOR’S DEPUTY CHIEF OF STAFF
It is not at all surprising that Governor Michelle Lujan Grisham appointed as her Deputy Chief of Staff Diego Arecon, who retired last year from the Albuquerque Fire Department given their history of working together for many years. Mr. Arecon for years was the Albuquerque Firefighter’s Union President and a lobbyist for the fire union when it came to labor issues in Santa Fe. Originally, he was appointed by the Governor as the “Labor Relations” special advisor.
Years before becoming an elected official and after being a cabinet secretary, Governor Michelle Lujan Grisham was employed by the Firefighters Union and lobbied and worked on changes to Workers Compensation law. Those changes to the law were long overdue and increased coverage to firefighters and first responders for certain types of illnesses and diseases caused or related to their work environment. Such changes were common place throughout the country either by changes to the Workers Compensation laws or by court rulings.
ROLE OF CHIEF AND DEPUTY CHIEF OF STAFF
When it comes to a Governor, a chief of staff and deputy chief of staff, generally work behind the scenes to solve problems, mediate disputes with cabinet members, and deal with issues before they are brought to the Governor. Often chiefs of staff act as a confidante and advisor to the Governor, acting as a sounding board for ideas. The chief of staff normally manages the governor’s office, overseeing the daily operations and interrelationship of the gubernatorial staff and determining what decisions will be taken to the governor.
The chief of staff and deputy chief of staff helps the governor to develop and maintain a focused policy agenda. As primary strategist, chiefs of staff and deputies help to reinforce and promote the governor’s commitments and agenda. Chiefs of staff to be effective should be loyal to the Governor that appoints them, the Governor’s policies and fully committed to those policies. One thing for certain is that no Chief of Staff or Deputy Chief of Staff should ever promote their own personal agenda or the agenda of anyone else but the Governor. No Chief of staff or assistant chief of staff should ever represent their own personal agenda as the agenda of the Governor they serve.
GOVERNOR’S PERA SOLVENCY TASK FORCE 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 (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.”
ORGANIZED OPPOSITION TO TASK FORCE RECOMMENDATIONS
The Retired Public Employees Union (RPENM) is pushing back hard on plans to overhaul New Mexico’s underfunded pension system for public employees. Gerald Chavez, an RPENM Board Member and past president wrote an article published in the organizations Summer News Report and sent to all RPENM members. Mr. Chavez also served on the Governors Task Force. The published article was very damning with the most critcal paragraphs as follows:
“Unfortunately, the Governor’s executive order outlined some basic requirements or assumptions that served as the starting point for the task force, which may have unnecessarily limited the work of the task force and led us down a doomed fate. The task force was required to use a 25-year amortization period for the fund to achieve 100% or near 100% solvency. These assumptions are unnecessary, counterproductive and contrary to the latest thinking by leading experts in the field of pension fund management. Louise Sheirner of the Brookings Institution, Byron Lutz of the Federal Reserve Board and Jamie Lenney of the Bank of England just released a lengthy and detailed report convincingly countering such assumptions. Any serious recommendations, much less action by the legislature should, at the very least, consider the work of these and other experts.
The focus of the presentations throughout the task force meetings painted a “bleak” future of the stock market, highlighted PERA’s recent struggles to meet its yearly assumed investment rate of return (PERA has not met its benchmark for the past several years) and included discussions about the possibility of future downgrades to NM’s bond rating status. In addition, the Cost of Living Adjustment benefit or COLA was highlighted as the biggest impediment to solvency from the get-go and other issues were never considered or even discussed.
… I immediately voiced my concerns regarding the representation on the task force, or more specifically, the under representation or inadequate representation from retirees and retiree organizations on the task force. I also raised serious concerns that the task force was not receiving presentations and/or information from experts representing points of view that differed from the PERA executive staff as well as concerns about the short time frame to complete our work. These limitations and issues significantly hindered, if not irrevocably prevented the task force from conducting the due diligence we should have engaged in and may ultimately prevent the task force from developing fair, balanced and comprehensive recommendations.
Obviously, by focusing on modifications to the COLA benefit, almost exclusively, the task force was led down the road to a “quick fix” that may not adequately consider all the relevant information and options. The starting point of the task force presented an initial bias and did not allow the task force to address potential inconsistencies within the various funds, such as the significant shortfall of the Municipal Fire and State General plans that amount to approximately half of PERA’s unfunded liability. At the end of the day, this failure to even address many critical issues will likely lead to the need for additional reforms in the immediate future.
As of the last meeting on July 11th, there was only one proposal, referred to as the “shared risk” model that was even being considered by the task force. No other proposals or models were considered by the task force. In addition to employee and employer contribution increases of 2% from each and a benefit cap change, it largely focuses on a 3-year suspension of the COLA, along with future COLA benefits being tied to the performance of the fund’s investment rate of return. I strongly voiced the need of the task force to consider different options, gather more information, run various scenarios and look at all options. I also urged the task force to consider “Grandfathering” in retirees from the proposed changes to and/or suspension of the COLA.”
According to the retiree union, the retirement system does not actually need to reach full funding and there is no immediate crisis and less drastic measures can be taken. The funded ratio for PERA assets divided by its liabilities is now at about 74%.
The group of retirees are saying full funding is not necessary and cite academic research published by the Brookings Institution, a Washington, D.C.-based think tank. Jamie Lenney of the Bank of England, Byron Lutz of the Federal Reserve Board of Governors and Louise Sheiner of the Brookings Institution wrote the analysis. The authors said the presence of unfunded liabilities doesn’t necessarily mean a pension plan is unsustainable. According to the study:
“Overall, our results suggest there is no imminent ‘crisis’ for most [government] pension plans” [and ] that pension plans “have always operated far short of full prefunding.”
Notwithstanding, experts in retirement plans say 100% funding is still a “worthwhile goal.” Alex Brown, research manager for the National Association of State Retirement Administrators, said there’s broad consensus among actuaries, policymakers and professional groups that government pension plans should target full funding over a reasonable period of time.
Miguel Gómez, the Executive director of the Retired Public Employees of New Mexico said the Brookings analysis suggests New Mexico has plenty of time to address its pension funding and shortfall. According to Gomez, adjustments to PERA are in order but it is not necessary to reach 100% funding within 25 years and there is still time to achieve it. Gomez also suggested setting a less ambitious goal showing the credit rating agencies that New Mexico is taking serious steps to better fund its pensions but without creating unnecessary harm.
On August 17, it was reported that total state revenue collections were roughly $273 million above projected levels through April due primarily to skyrocketing oil production in southeastern New Mexico that has led to a regional economic upswing. New Mexico is now ranked the 3rd largest oil producing state in the United Sates. The state is now on track to collect an unprecedented $7.8 billion in the budget year that ended June 30 and could allow for additional spending increases on public schools, roads, pension funds and other state programs.
COMMENTARY AND ANALYSIS
The Governor’s Executive Order creating the Task Force contains only 3 major requirements:
1. A 7.25% actuarially certified projection,
2. Recommend employer and employee contribution levels and benefit modifications that are actuarily sound and preserve PERA defined-benefit plans and
3. Consider funded levels of the PERA funds.
The Task Force makes 9 recommendations that are nothing more than general declarations of goals that contain absolutely no findings and information as to how the recommendations were arrived at nor how they will be achieved. There is no financial analysis how the recommendations will achieve the 7.25% actuarily certified projections. Most importantly, the Task Force recommendations contain no data how the modifications recommended will preserve the PERA defined-benefit plans, just declarations that it will be achieved.
Last year, candidate for Governor Michelle Lujan Grisham said she would oppose cuts to PERA 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.”
The PERA Task Force Recommendations are in total opposition and conflict sharply with the Governor’s position when she was running for Governor. This is surprising seeing as she appointed the Task Force.
GOVERNOR SHOULD REMOVE DEPUTY CHIEF OF STAFF
It is painfully obvious that the Governor’s Deputy Chief of Staff Diego Arecon was promoting his own former union or his personal agenda and not that of the Governor. Deputy Chief of Staff Diego Rincon should have known better than to release the recommendations without more thought, more detailed analysis with findings and justifications on each one of the recommendations. No public testimony was allowed by Arecon and Task Force meetings were held behind closed doors. The Deputy Chief of staff has now placed the Governor in a very awkward and precarious position that will alienate many of her supporters for advocating his own agenda and not her agenda. For these reasons Diego Arecon should be replaced as Assistant Chief of Staff and be given duties elsewhere in state government.
THE ROAD FORWARD TO 100% SOLVENCY
The first thing that Governor Michelle Lujan should do is to set aside the recommendations of the PERA Pension Fund Task Force. What are needed are outside experts in finance and pension funds to make recommendations to the legislature on what can and should be done to save PERA, presuming it really does need saving. The Governor should form a working group of actual experts and go from there to find real solutions.
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. Nothing was mentioned by the Task Force of trying to implement any other types of pension programs to be offered. There was no Task Force recommendations of a major infusion of finances that will be available from oil and gas production.
PERA’S goal is to reach 100% funding of liabilities by 2043. The New Mexico PERA pension program has 75.3% of funded liability in current funding assets to future liability making it one of the strongest pension programs in the country. The two major pension funds that are currently problematic are shortfalls of 7.99% of State General pensions and 13.87% for Municipal Fire Pension programs. Contribution shortfalls of State General and Municipal Fire are up and until 2066. PERA management has failed to articulate in clear terms all the options available to insure PERA will reach a 100% funding ratio by 2043.
Revenues from the oil and gas boom should be used in part 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 with the funding no doubt being pumped into the economy. While the State is experiencing a windfall in increased revenues, the New Mexico Legislature should use a portion, not all, of the surplus revenues to increase funding to the PERA funds that are currently underfunded, currently the municipal fire and general worker funds to the tune of $4.1 Billion.
At a minimum, the PERA Pension plans are solvent for at least 23, if not more years. Notwithstanding, PERA Pension reform must again be undertaken. The difference is the New Mexico Legislature has time to address the PERA pension system and the sky is not falling by any means. The legislature can make adjustments like increasing age of retirements, change the formula to calculate retirement, make increases in contributions and infuse state funding into the pension funds, but only those that are underfunded which currently the municipal fire fighters fund and the general worker fund.
Better management of the pension funds and increasing returns on investment should be the major goal of any changes to the PERA pension programs to insure long term solvency.
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