The Public Education Retirement Association (PERA) is the legislative created and state regulated retirement association for all state, county and municipal government employees. 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 pays pensions to more than 40,000 retirees and also has upwards of 50,000 active members who are working and paying into the system. PERA manages a $15 billion pension fund and income from fund investments that helps pay pensions owed.
PERA SOLVENCY MEASURES ON 2020 GOVERNOR’S CALL
Over the last few years, it has been reported that PERA is 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. 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 $6.6 billion in unfunded liability.
The PERA’s retirement system’s funded ratio, which is the plan’s assets divided by its liabilities, is now at 70%. The PERA governing board has set the goal to reach 100% funding of liabilities by the year 2043. The PERA pension system’s $6.6 billion in unfunded liabilities, or shortfall, has already damaged New Mexico’s credit rating.
For the 2020 legislative session, Governor Michelle Lujan Grisham has endorsed a complex proposal to overhaul New Mexico’s chronically underfunded PERA proposed by Democratic legislative leaders. The proposal builds on the work of a PERA task force established by the governor with some major changes. The most controversial recommendations by her task force involved the 2% cost of living (COLA) currently guaranteed to all retirees.
According to media reports, the legislation will establish a “profit-sharing” model for the annual cost-of-living adjustments that most retirees now receive. Rather than an automatic 2% increase in their pensions each year, the actual amount would fluctuate, anywhere from 0.5% to 3%, depending on investment returns.
Under the proposed legislation, government employers and employees will pay more into the system with a schedule that phases in higher contributions. Other changes will help retirees who are older than 75, disabled or receiving pensions of less than $25,000 a year, despite 25 years of service.
With respect to annual cost-of-living adjustments, they would be increased by half a percentage point to 2.5% for retirees who are 75 or older. This was a change made after requested by Governor Lujan Grisham.
Under the proposed legislation, many retirees would receive a temporary reduction in their cost-of-living increases. For 3 years, retirees would get an extra check equal to 2% of their pension. Such a “one lump” sum payment in one check would eliminate the compounding effect of having each 2% build on the previous 2% increase.
The PERA reform legislation also calls for allocating $76 million in state funding into the system to cover the cost of the extra checks. According to PERA officials and legislative finance analysts, the net effect would be an immediate $700 million reduction in the pension system’s unfunded liability.
The retirement system’s funded ratio is now about 70% and the legislative changes are aimed at wiping out the liability within 25 years resulting in 100% funding of future liabilities.
GOVERNOR’S PROPOSED 2020 BUDGET AND LEGISLATORS PROPOSED BUDGET
On January 21, 2020, the 30-day New Mexico legislative session begins. The 30-day session is referred to as the “short session” which are held in even number years while 60-day sessions occur in odd number years. Thirty-day sessions are limited to budgetary matters and issues approved for consideration and placed on what is referred to as the Governor’s call. Revenue bills, such as taxation, may also be considered during 30-day sessions. Governor Michelle Lujan Grisham has announced that she will place on the agenda the PERA Solvency measures.
On January 6, 2020, Governor Michelle Lujan Grisham released her proposed executive budget to be considered during the 2020 New Mexico Legislative session. The proposed budget is a $7.68 billion dollar budget reflecting a 8.4% increase with a 25% General Fund reserve set aside in case projected revenue levels do not materialize. Under the proposed budget, spending will again rise for the second consecutive year. If adopted by the legislature state spending will increase by $596.3 million, the 8.4% increase over the current fiscal year that ends June 30, 2020. Under the Governor’s budget, money is also being set aside in cash reserves in case projected revenue levels do not materialize. In her 2020 proposed budget, the Governor is proposing a $76 million allocation for PERA but is not proposing any funding for Educational Retirement Board (ERB), the educators retirement plan.
On January 7, 2020, one day after Governor Michelle Lujan Grisham released her proposed executive budget, the New Mexico Legislative Finance Committee (LFC) released its own 2020 proposed budget. The Committee’s proposed budget calls for about $7.5 billion in ongoing spending which is an increase of 6.5% over current levels. The Governor’s proposed budget calls for an 8.4% increase. The Legislative Finance Committee is recommending $150 million to help the state’s two main pension systems, the PERA system and Educational Retirement Board (ERB) for educators. The Governor is proposing $76 million for PERA and no funding for ERB, the educator’s retirement system.
PRESIDENT OF RETIRED PUBLIC EMPLOYEES OF NM RESPONDS
On December 30, the Albuquerque Journal published a guest editorial column on the PERA solvency legislation written by Joel Pafford, the president of the Retired Public Employee’s of New Mexico Association board of directors. Following is the column with the link to the article:
TITLE: Gov. takes too-much-too-soon route to ‘fix’ pension
“The governor’s recent proposal regarding PERA is particularly alarming and galling because it is completely unnecessary.
Her idea is to cobble together over $6 billion in just 25 years to fully pre-fund one of New Mexico’s two large public pension funds. She is not proposing to do the same thing with the other fund, which has an even worse funding ratio.
There are almost 4,000 public pension funds around the country and only a handful are 100% funded. In aggregate, these funds have always operated far short of full pre-funding.
What’s going on? Quite simply, it has become the mantra of some pension fund administrators, financial consultants that benefit from such schemes and ideological zealots that government pension funds should be 100% funded. These individuals are wrong. A recent report from the highly respected Brookings Institution, “The Sustainability of State and Local Government Pensions: A Public Finance Approach,” debunks this false narrative. Tom Sgouros also discusses these issues in his 2017 report for the Haas Institute at the University of California, Berkeley.
Not only is it not necessary for these funds to achieve 100% funding, there are serious risks in attempting to achieve full pre-funding. Funds attempting to reach full pre-funding generally take more risks in their investment portfolios. Most importantly, trying to achieve full pre-funding, especially over a relatively short period, requires significant sacrifices and financial pain. This includes cuts to retirees’ COLA benefits, increases in contribution rates and significant subsidies from state government, all elements of the governor’s proposal.
The Brookings report argues for sustainability and a pay-as-you-go (PAYGO) model, rather than full pre-funding. The authors make a compelling case not to fully prefund public pension funds, especially in today’s low-interest rate environment. In addition, there is almost no advantage to starting the stabilization process immediately as opposed to years in the future.
It is worth noting that PERA has not met its own performance benchmarks for several years, during a time of record stock market highs. A new study also found that PERA is among the worst-performing public pension funds in the Southwest over the past decade.
There should be a fair and honest process to address PERA. We envision a process where independent expert consultants analyze multiple models and seek extensive public input in a transparent and collaborative manner. The Legislature should issue [Request For Proposal] … to analyze models that run the full gamut of options. They should consider ideas such as reducing the annual multiplier as well as closely look at the individual funds or divisions within PERA, as several divisions are underfunded while others are fine or over funded.
There is no immediate crisis. In the private sector, pensions should probably be 100% funded to protect workers in case of bankruptcy. Governments, on the other hand, may encounter periodic difficulties due to economic cycles and fluctuating revenues, but they are generally not going to declare bankruptcy and go away. Current employees help pay the benefits of current retirees and this cycle continues indefinitely, much like social security.
Fully prefunding public pension funds amounts to covering the total future benefits of current retirees and workers, even young workers that have just started their careers and will not retire for several decades. The real question of a plan’s fiscal viability is whether it can continue to pay its obligations each year, not whether it can cover all future obligations today. We likely only need to reach a funding ratio of 70-80% to achieve complete stability and sustainability.
It is much more important to have a plan that attempts to reach sustainability over a long period rather than have a quick fix that may be overly burdensome to one generation or group. The current proposal will create lasting divisions and resentment and embarks New Mexico on a path most commonly advocated by ideological zealots rather than our traditional path of consensus and working together as one community.”
Following is the link to the Journal guest column
PROPOSED CHANGES TO PERA BOARD SELECTION AND QUALIFICATION
According to Democratic State Senator George Munoz, (D) Gallup, he has seen the Public Employees Retirement Association Board degrade into petty bickering and fighting at board meetings. During the past year, the monthly PERA boarding meetings have had discussions ranging from who should pay for snacks, to one member accusing another member of trying to steal her phone which led to a pause in the meeting.
After sitting in on multiple PERA meetings and seeing the board’s conduct, Munoz decided to sponsor a bill to be introduced in the upcoming 2020 legislative session that will change how board members are selected. The current board members are voted into their positions by PERA retirees and participants.
In response to the Board’s conduct, State Senator Munoz has pre-filed legislation for the 2020 legislative session that begins on January 21 that if enacted will change how the PERA Board functions. If the bill passes, it will change how the board is formed and require all members to have financial experience.
According to Munoz:
“We want the Governor to appoint three members. We want the counties and municipalities to appoint two members. We want the retirees to have two members, so we get diversity. … We need a board that’s constant, stable, and steady and understands the problem with our PERA fund right now.”
Think New Mexico, a local think tank, supports the proposed legislation.
On January 21, 2020, the 30-day New Mexico legislative session begins. Thirty-day sessions are limited to budgetary matters and issues approved for consideration and placed on what is referred to as the Governor’s call. State lawmakers have already pre-filed nearly 90 bills ahead of the upcoming legislative session, but what actually gets put on the agenda is totally up to the Governor.
COMMENTARY AND ANALYSIS
Changing the process on how PERA board members are selected and adding pension finance backgrounds as qualifications in all likely will not be placed on the Governors call. Such a dramatic change also runs significant risk of alienating the overwhelming majority of PERA retirees and contributors who want a major say in the selection of board members by virtue of voting for them. The PERA Board employs a professional staff of analysts and pension experts which is how it should be but requiring board members to have financial background or expertise in pension investment will likely be counterproductive.
PERA Governing Board meetings held during the general election race for Governor were 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. Audiences were extremely diverse, and retirees vote. The audiences were at times confrontational with the PERA Board members. Accusations of mismanagement of the funds were also made.
During her campaign, 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.”
The PERA solvency plan the Governor supports runs a significant risk of alienating some of her strongest supporters that could signal trouble for her in three years when see seeks a second term. Governor Lujan Grisham received a significant number of union endorsements and campaign donations especially from state government unions such as AFSME. The PERA solvency changes could very well “poke the bear” of 90,000 PERA contributors, retirees and their family members.
The PERA governing board has set the goal to reach 100% funding of liabilities by the year 2043 declaring there is a PERA pension fund “crisis”. The truth is, there is no crisis and the PERA Pension plans are solvent for at least 23, if not more years. The PERA pensions funds have always operated in the red, with investments ebbing and flowing to pay retirement benefits as they incur. It is the funds financial advisors who want a 100% funded program, no doubt motivated by getting their hands on more money to invest and getting hirer investment fees.
The New Mexico PERA pension program has 70% 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.
Notwithstanding, PERA Pension reform must again be undertaken in some form to deal with to some extent the shortfall of underfunded liabilities. The New Mexico Legislature has time to address the PERA pension system and the sky is not falling.
The legislature can make adjustments like increasing age of retirement, 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 are always relied upon to pay for benefits.