Pension ‘fixes’ aren’t going to do the trick

A $50 billion gamble with taxpayer money — that is what is at stake in reforming New Mexico’s two pension plans and the retiree health plan. If not done correctly, taxpayers will be ultimately responsible for payment.

Unfortunately, the pension reform measures recently passed by the state Legislature are not only inadequate for the long term financial success of these plans — they could hasten their ultimate demise and bankruptcy, leaving taxpayers with $50 billion of liabilities to pay to retirees.

This is not a political issue of how generous the benefits should be anymore, it is a mathematical issue now. These plans could actually run completely out of assets to pay benefits in the next 8-10 years.

Actuaries explain it this way: All three of these plans are very complex and sensitive mathematical models. When projections are made over 30 years, all the underlying assumptions must come to fruition or the results can be horribly inaccurate.

The pension plan for educational employees can be used to illustrate this:

♦ Assumptions include market rates of return on assets — 7.75 percent

♦ Discounting future liabilities (payments) of the plan — 7.75 percent

♦ Active participant growth — 0.75 percent per year

♦ Salary increases — 3.75 percent per year

There are many more, including mortality or longevity tables (how long will retirees live and collect benefits).

You can easily see that many of these assumptions are not being met or are unrealistic — evidenced by the significant increases in the unfunded liabilities of these plans.

The June 30, 2012, actuarial valuation of the of the educator’s pension shows 10-year returns on assets of 6.5 percent, active participants actually declined last year, and educators haven’t received a raise for over four years now. In 2001, this pension was 91.9 percent funded. Over the past 11 years it has declined to 59.9 percent funded on a market value basis.

Obviously the assumptions are not being met, and the ugly fact is that benefits are too generous for the contributions being made.

But here’s the death knell: We may have run out of time.

Benefit payments to retirees are to be $860 million this fiscal year, ending June 30. Contributions are $545 million. That’s over $300 million that has to be made up by investment performance. This isn’t the scary part because a mature plan like this one will have a larger payout. The scary part is the annual increase of the benefit payments: $60 million per year.

In 5 years, the payout will approach $1.15 billion, in 10 years $1.44 billion.

The difference between the payouts and contributions becomes unmanageable and will exhaust the asset base to zero with one or two years of bad investment experience — we’ve had four in the last 12 years. At that point, all payments would have to be made from contributions — and from taxes assessed on New Mexico taxpayers.

Taxpayers may ask: Why aren’t reforms being made that are significant enough to avoid this catastrophe?

It’s very simple. These plans are controlled by the very people who will receive the benefits as well as the organizations they represent: retirees, unions and the like. They want the fewest benefit changes at maximum taxpayer expense.

The educator pension reform has taxpayers increasing their contribution by $75 million per year with educators adding $23 million. Benefit changes are minimal: slight reduction in cost of living increases, new employees waiting longer for benefits.

We have a choice to make: Either get ready for budget busting contributions or make benefit changes that are fair but significant enough to get to 100 percent funding of the plan in 20-24 years so there is some room for error if every assumption is not achieved each and every year for the next 30, which is what the reforms just passed will demand.

Albuquerque residents are spending an extra hour a day in their cars because we can’t even pay for needed infrastructure. Imagine what it’s going to be like if these pensions are not properly corrected.