(EDITORS NOTE: In the interest of full disclosure to readers, the author of this article retired in 2009 from government service with more than 27 years of vested service in the PERA pension program.)
(EDITORS NOTE: This March 9 blog article was edited to include the March 14 Albuquerque Journal Editorial followed by the link.)
As was expected, on March 2 Governor Michelle Lujan Grisham signed into law sweeping changes to New Mexico’s retirement system for police officers, firefighters and public employees known as the Public Employees Retirement Association (PERA). The legislation was labeled as PERA Pension Reform and was placed on the 2020 thirty-day legislative session by the Governor making it one of her major priorities for the 2020 session. The passage of the legislation was not even close with the Senate voting 25-15 and the House voting 40-28.
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 damaged New Mexico’s bond rating.
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 retirement system. The number of people affected by the changes is multiplied at least two and three times when you add in family dependents.
The 2020 pension reform legislation is just another attempt in the last 8 years to address solvency. In 2013, the New Mexico legislature reduced retirement benefits for future workers, active employees and covered retirees. It also enacted stricter retirement eligibility guidelines for future hires. The 2013 solvency fix also increased employee contributions and taxpayer-funded contributions. At the time of the changes in 2013, the legislature proclaimed, much like what the Governor and the legislature are doing now, that they had adverted a crisis and saved PERA.
What has changed since 2013 is that 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”. Currently, the PERA pension program has 70% of funded liability in current funding assets to future liability.
WHAT THE LEGISLATION DOES
Under the legislation enacted and signed into law, there will be a temporarily freeze of cost-of-living adjustments for some retirees and require public workers and government agencies to pay more into the system. The changes are intended to better position the Public Employees Retirement Association to withstand an economic downturn. The plan is now about 70% funded, with over $6 billion in unfunded liabilities.
In a statement released to the media, the Governor had this to say:
“By paying out more than it was taking in. … PERA was on a path to eventual bankruptcy. Now we’ve reversed course, and I’m confident New Mexico can keep its promises to current and future retirees.”
FIERCE OPPOSITION BY RETIREES
PERA Retirees turned out in force to object to the proposed changes to the retirement system especially dealing with their annual cost-of-living adjustments. Legislative committee hearings were packed with angry retirees who made it clear how much they rely on the “cost of living” adjustments to keep up with inflation and ever-increasing premiums for health care.
Legislative supporters of the changes said that while painful, the sweeping changes were necessary to maintain the solvency of the retirement funds and to achieve 100% funding over the next 25 years.
The pension reform legislation was a bi partisan effort sponsored by Democrat Senator George Muñoz, D-Gallup and Republican Representative Phelps Anderson, R-Roswell.
Democrat Senator George Muñoz, D-Gallup, had this to say:
“We’re watching after everyone’s future and safeguarding the state’s bond rating.”
Republican Representative Phelps Anderson
“The path to PERA solvency would never have been accomplished without this bipartisan effort.”
TASK FORCE RECOMMENDATIONS ADOPTED
The Pension Reform legislation 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 Pension reform task force was essentially packed with public safety union representatives none who had any financial background in government pension planning.
Public Safety Unions are a small fraction of the states work force and retirees. PERA’s Board Chair, Jacquelin Kohlasch, along with Executive Director Wayne Propst and Chief Investment Officer Dominic Garcia were appointed Task Force members. The chairman of the task force was the Governor’s Deputy Chief of Staff, a retired fire fighter and former fire union president who lobbied for enactment of the bill. Public Safety Unions are a small fraction of the states work force. No women were appointed to the task force.
The task force final recommendations were heavily influenced by the PERA Executive Director Wayne Propst and Chief Investment Officer Dominic Garcia. Propst and Garcia at the time were in conflict with many of the duly elected PERA Board of Directors over pension investment strategy. Propst and Garcia were accused of pension fund mismanagement by Board members. Propst was also accused of impropriety by board members for giving himself and his staff huge raises without conferring with the PERA Board. Things got so bad that the New Mexico Attorney General initiated an investigation resulting in a finding of no misconduct. Notwithstanding the controversies, on November 1, 2019, by an 8-4 vote, the PERA board voted not to terminate Executive Director Wayne Propst.
The most controversial aspect of the reform bill involves the 2% cost of living (COLA) currently guaranteed to all retirees. The legislation freezes many retirees’ cost-of-living adjustments for two years that will save money. After the two year freeze, the legislation establishes 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.
Most state, county and municipal employees that contribute to PERA and the governments they work for will have to pay more into the PERA system, which will reduce take home pay for workers and require more government spending. The contribution increases will be phased in over several years. Government employees and employers each will be required to pay and additional 2% of a person’s salary.
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.
Under the reform measures, some of the mandated contribution increases will be eliminated as the health of the pension fund improves. There are “public safety” employee exemptions where police and corrections officers and low-paid workers will not be subject to the increases in contributions.
Below is a link for news coverage:
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 legislation the Governor signed 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, the crisis is fabricated. The PERA Pension plans are solvent for at least 23 years, if not more. 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 have now fabricated a crisis saying there is a need for a 100% funded program, no doubt motivated by getting their hands on more money to invest and getting increased investment fees and commissions.
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.
The fact that the Municipal Fire Pension program is 13.87% underfunded must be noted. The Chairman of the Governor’s Pension Reform Task Force is one of the Governor’s chief of staff, a retired fire fighter and former Albuquerque Firefighter Union President. Municipal Fire Fighter Pensions are far more lucrative than state worker pensions as to benefits with only 20 years needed to retire with a full pension of a high three year pay, and much less is required to be paid into the pension system.
The Governor’s PERA Pension reform task force was essentially packed with public safety union representation. Firefighters from across the state, especially from Albuquerque, appeared in full firefighters uniform and packed the legislative committee hearings in support of the pension reforms. Public Safety employees are a small fraction of the PERA contributors.
The argument made essentially was that the legislature needed to “spread the pain” around to all pension programs, and not touch any of the “public safety” pension programs and not demand more time to retire or increase employee contributions. The task force declined to promote an infusion of funding from the legislature for only those programs that are underfunded and that have not met investment return goals.
The New Mexico Legislature and the Governor rushed into 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 was more than enough 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 the pension 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, the legislature could have made 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, and the current PERA management investment team is not getting the job done, but thanks to Wayne Propst, he and his management team are enjoying huge pay raises.
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 former Republican Governor “She Who Must Not Be Named” avoided pension reform knowing the dangers and pitfalls. Governor Michelle Lujan Grisham on the other hand has wondered into territory that will probably have an impact on her re election bid or at least her overall popularity with some of her core supporters.
PERA retirees can expect the New Mexico legislature will once again have to make further modifications in future years to the PERA pension programs because what was approved by the legislature will not get the funds to 100% solvency. Too bad, it did not have to be this way had the Governor and the legislature shown a little more patience to address real pension reform and not rush it in a 30-day session.
Below is the March 14 Albuquerque Journal Editorial followed by the link:
Editorial: Much-lauded state pension ‘fix’ is really just a Band-Aid
BY ALBUQUERQUE JOURNAL EDITORIAL BOARD
Saturday, March 14th, 2020 at 12:05am
There was plenty of self congratulation when the Legislature passed and the governor signed New Mexico’s latest “fix” for the state’s chronically underfunded public employee pension system. It pumps in a one-time cash infusion of 55 million in tax dollars, freezes and limits cost-of-living adjustments for two years, moves to a profit-sharing model for COLAs – based on investment success – and bumps up contributions by both employees and government employers – aka taxpayers.
“By paying out more than it was taking in,” the governor said, “PERA was on a path to eventual bankruptcy. Now we’ve reversed course, and I’m confident New Mexico can keep its promises to current and future retirees.” Sen. George Munoz, D-Gallup and a pension-fix co-sponsor, said “we’re watching after everyone’s future.” Rep. Phelps Anderson, R- Roswell and a co-sponsor, told colleagues “New Mexico has overpromised, (and) we’ve got to step up and deal with that. …”
They were half right. We have overpromised. But this isn’t the long-term fix needed. If it feels like you’ve seen this movie before, you have. You’re likely going to see it again – especially if markets continue to reel under the impact of oil prices and coronavirus. Fund solvency is tied to investment success.
Lawmakers “fixed” PERA in 2013, using many of the same tools – increasing contribution rates and trimming benefits.
PERA Executive Director Wayne Propst said in November 2013 he was optimistic but it was too early to “pop the champagne corks.” No kidding. PERA’s unfunded liability has climbed from $4.6 billion to more than $6 billion since then. (And in 2019 the Legislature approved a $5.5 million infusion – described as a small step for pension reform.)
This year’s legislation grew out of a governor’s task force and drew heated opposition from retirees, who understandably feel promises should be kept. Approval wasn’t easy.
But declaring victory and achieving it are different things.
When this legislation is fully implemented in 2023, government will contribute 19.24% of each salary under the main plan for PERA-covered workers, who will contribute 10.92%.
The “fix” didn’t implement the vital structural change needed for long-term solvency – changing when workers can start drawing benefits. At a time when life expectancy has increased, as a general rule state workers can retire after 25 years and draw benefits of up to 90% of their best three years’ salary for life.
It’s worth noting in 2013 the state had about 55,000 employees and nearly 34,000 retirees. This year? Workers are about 50,000, retirees 40,000. With the baby boom aging out of the workforce, the basic trend will continue – and a hiring spree to shore up the fund will make things worse.
Sen. Daniel Ivey-Soto, D-Albuquerque, said during a pre-legislative seminar it isn’t possible to have a fiscally sound system in which you can work for 25 years, then draw benefits for 45. “That’s not a pension system. That’s a Ponzi scheme.” Ultimately, current workers must be protected but a path to fiscal sanity needs to look more like Social Security, where you don’t draw full benefits until close to retirement age.
The structural problem here is pretty obvious, as is the lack of appetite for real reform – especially in an election year. Meanwhile, it’s fair to suggest that at nearly 20%, we’ve reached the limit for bumping up public contributions. Let’s face it. A huge part of the state’s population has no retirement plan outside Social Security.
Ivey-Soto is right. This hard discussion can only be put off for so long. The taxpayers of this state, and the public employees, deserve a real “fix.”
This editorial first appeared in the Albuquerque Journal. It was written by members of the editorial board and is unsigned as it represents the opinion of the newspaper rather than the writers.