On February 12, the New Mexico State Senate passed Senate Bill 72 (SB 72) commonly referred to as the PERA Pension Reform Bill on a 25-15 vote after a mere hour of debate. The Senate Finance Committee previously voted to recommend passage by a vote of 10-2, but only after hours of testimony that was mired in acrimony. SB 72 is aimed at erasing the state pension system’s $6.6 billion unfunded liability aimed at turning around New Mexico’s chronically underfunded retirement system for police, firefighters and other public employees. Senate Bill 72 was passed, but the vote did not fall along party lines with Republicans and Democrats taking both sides. The proposal now heads to the House for approval.
The legislation would require government agencies and their employees to pay more into the pension system. It also substantially revises how retirees’ annual cost-of-living adjustments are calculated. The most controversial provision of the legislation is that it will freeze many retirees cost of living adjustments (COLA) for two years and then move to a “profit-sharing” model with annual raises fluctuating from 0.5% to 3%, depending on investment returns and the financial health of the pension fund. Most retirees now get a 2% raise each year. SB 72 includes an injection of $76 million to help improve the financial health of the pension funds.
The proposal was amended on the Senate floor to leave in place a cap on how much employees can receive in retirement. State workers can now retire at 90% of their final average salaries. A previous version of SB 72 had called for lifting the cap which would have allowed people to retire with pensions exceeding their annual salaries, if they worked long enough. But senators on Tuesday opted to stick with the current 90% cap.
After the Senate vote, Governor Lujan Grisham issued the following statement:
“We have made promises to New Mexico’s current and future retirees and these changes will ensure those promises are kept. A stable and solvent PERA matters to all New Mexico taxpayers.”
The bill must be passed by the House by next Thursday before it can be signed by the Governor to become law.
GOVERNOR’S PRIORITY IS TASK FORCE POORLY ADVISED PRIORITIES
Senate Bill 72 is largely based on recommendations from a task force the Governor appointed last year to come up with pension reform recommendations. The Governor’s PERA Penson reform task task force was essentially packed with public safety union representation none who had any financial background in government pension planning. The chairman of the task force was one of the Governor’s chief of staff, a retired fire fighter and former union president who is now lobbying for enactment of the bill. No woman were appointed. Public Safety Unions are a small fraction of the states work force.
The most controversial recommendations made by her task force involved the 2% cost of living (COLA) currently guaranteed to all retirees. 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.
Supporters of the changes argued that while difficult, they are necessary to ensure the Public Employees Retirement Association is healthy enough to withstand an economic downturn. Sen. George Muñoz, a Gallup Democrat and sponsor of the bill had this to say:
“I think the retirees are a little upset but we’re watching after their future. It’s hard to do it in a 30-day session, but it’s going to be even harder when we have to cut benefits to employees in a special session. … We need to act now. We could lose these funds completely.”
Wayne Propst, PERA’s executive director, said the cost-of-living adjustment the system has been paying out greatly exceeded inflation for many years. He also stressed the profit-sharing model would allow the system to only make payments “when we have the resources to do”.
According to Propst:
“For the last 20 years, we’ve been paying [the cost-of-living adjustment] on a credit card. This changes it to paying on a debit card.”
Propst and the Governor’s Office argue the older retirees need not worry about the reform because it actually proposes to increase the cost-of-living adjustment by 0.5 percent for those over 75, which is 30% of the current 41,000 recipients.
The bill’s opponents were more than just a little upset. Loretta Naranjo Lopez, a member of the Public Employees Retirement Association’s board, during the Senate Committee hearing, accused the pension system’s staff of “embezzlement” and the governor of “undue and unethical influence” on the board. Senator John Arthur Smith, the committee’s chair, slammed his gavel multiple times, demanding Naranjo Lopez speak about the bill itself instead of making accusations.
Opponents that did speak about the bill voiced a number of concerns, particularly about its proposal to move to a profit-sharing model for the annual cost-of-living adjustments retirees receive in their pensions.
Senator John Sapien, D-Corrales, called the part of the cost of living plan “flawed.” He and other senators suggested the annual adjustments should be tied to inflation rather than to investment returns. Under the proposed model, annual raises would range between 0.5 percent and 3 percent, depending on investment returns, rather than then 2 percent annual cost-of-living raises retirees currently get.
Senator Sapien assailed the bill’s changes to the system of annual cost-of-living adjustments. He argued it would ultimately leave retirees’ with smaller annual raises than they get now even after retirees had agreed to other painful changes to the retirement system seven years ago. According to Sapien:
“We’re asking them to give again with promises of profit-sharing that are not going to come to fruition.”
WHAT THE FUSS IS ALL ABOUT
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.
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 it was 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.
Under PERA’s current assumption of 7.25% investment returns, Propst has said, the average cost-of-living adjustment would be between 1.61% and 1.65%.
COMMENTARY AND ANALYSIS
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 has alienated some of her strongest supporters that could signal trouble for her in 3 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 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 advisers 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.
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. The New Mexico Legislature and the Governor have rushed a pension reform in a 30 session when it should have been taken up in a 60 day session. PERA manages a $15 billion pension fund and income from fund investments that helps pay pensions owed. There is time to address the PERA pension system and the sky is not falling. 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.
It is not necessary for these funds to achieve 100% funding and 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.
Rather than reducing Cost of Living Adjustments to the legislature could 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 are 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.
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. Former Governors Bill Richardson and Susana Martinez avoided pension reform knowing the dangers and pitfalls.
With only seven days left in the 2020 Legislative, Senate Bill 72 needs to be rejected by the house and pension reform taken up in a special session or during the 2021 session where there is time to consider pension reform once and for all.