New Mexico has two major government employee pension programs. The Public Employee Retirement Association (PERA) pension program has 50,000 state workers, municipal employees, judges, firefighters and law enforcement officers that participate and it pays benefits to about 41,000 retirees. The Education Retirement Board (ERB) has nearly 51,000 retirees and upwards of 61,000 active members, including teachers, school administrators and university professors.
Over the last few years, it has been reported the PERA pension programs for government employees 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, was at 70%, but with the stock market crashing, it has gone down. 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.
TASK FORCE RECOMMENDATIONS ADOPTED
On March 2, Governor Michelle Lujan Grisham signed into law changes to New Mexico’s PERA retirement system enacted by the 2020 NM legislature. Under the legislation enacted and signed into law, there will be a temporarily freeze of cost-of-living adjustments for some retirees. Starting are July 1, government employees and the government agencies they work for will pay more into the system. The changes are intended to better position the Public Employees Retirement Association to withstand an economic downturn.
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. The task force final recommendations were heavily influenced by the PERA Executive Director Wayne Propst and Chief Investment Officer Dominic Garcia.
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 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.
THE ECONOMIC DOWNTURN IS HERE
The changes enacted legislation was intended to better position PERA to withstand an economic downturn. That economic downturn is now here. In less than 2 months after the PERA reform legislation was signed into law, New Mexico’s two large public retirement systems have taken billion-dollar hits from the steep market downturn caused by actions taken in response to the coronavirus pandemic. The PERA and ERA pension funds rely on investment gains to help offset the difference between benefits owed over time and incoming contributions. The PERA retirement fund’s value has dropped from $16 billion at the first of January to down to $14 billion as of March 27.
What needs to be emphasized is that the stock market has crashed since the coronavirus outbreak due to concerns about rising unemployment levels and decreased consumer activity. The markets are fluctuating dramatically daily because of the pandemic and how the federal government is reacting to it, including the $2 trillion congressional stimulus package enacted.
Notwithstanding the large loss, the managers of both pension funds are saying the investment portfolio changes made to the funds in recent years will enable PERA to keep paying out benefits to retirees.
Wayne Propst, the Executive Director of the Public Employees Retirement Association had this to say about the losses in recent weeks:
“We’ve lost money, every investor has, but we could have lost a lot more money if we hadn’t taken a more defensive position. I don’t know how we could be in a better position than we are right now. … Nobody knows how this is going to play out.”
According to Propst, only 35% of the PERA pension funds are invested in equities which are affected by the fluctuating markets. The remaining funds, or 65%, are invested in bonds, alternative investments and in cash reserves.
According to Jan Goodwin, the Director of the Educational Retirement Board (ERB), ERB has a smaller percentage, at about 26%, of its funding in its portfolio invested in stocks. At the end of 2019, the total value of the ERB funds was upwards of $13.8 billion and it has dropped to $12 Billion. Goodwin said the market downturn will have to continue for an extended period time before seriously affecting the pension fund by saying:
“We’re not selling these investments and, over time, they’ll recover. We’re in good shape to keep paying out benefits.”
COMMENTARY AND ANALYSIS
Both Wayne Propst, the Executive Director of PERA and Jan Goodwin the Director of the ERB are downplaying the financial hit that both funds have taken in just one month because of the market crash and the investment losses. Propst and Goodwin both are being way too optimistic about the fate of both pension plans, no doubt because their own job security may be at stake if there in no quick rebound by the markets.
The blunt truth is the solvency of both PERA and ERB are tied to investment success and returns. The major losses such as what has happened in the last 6 weeks places both retirement programs in serious jeopardy.
PENSION REFORM RUSH JOB
The 2020 New Mexico legislature rushed pension reform during a 30 day short session at the insistence of Governor Lujan Grisham to implement her tasks force recommendations for PERA. The changes made to the PERA pension program were in no way real reform. The “reform” amounted to placing a band aid on a severed artery. The changes will not stop the flow of red ink from the pension program. Both pension programs are suffering from serious structural problems.
Rather than reducing Cost of Living Adjustments, the legislature should have made real adjustments such as increasing the 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. 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.
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 like they want. In the meantime, as retirees get older, they are now faced with the real possibility of their pension programs imploding at a time in their lives they can no longer be in the workforce.
Too bad, it did not have to be this way had the Governor and the legislature shown a little more patience and political will to address real pension reform and not rush it in a 30-day session. Pension reform should have been dealt with it in a 60-day session or a special session. It should have not been the product of a political agenda orchestrated by the Governor’s Pension Reform Committee and one of her Chiefs of Staff.