TAOS – The benefit structure of New Mexico’s pension systems for educators and other public employees is “unsustainable,” legislative analysts say in a new report.
And state lawmakers say it’s time for honest talk and hard decisions about how to shore up the financial health of the pension funds – before New Mexico’s credit rating endures more damage.
Some of their frustration boiled over Thursday in a meeting of the Legislative Finance Committee, a panel of lawmakers who help shape the state budget.
State Sen. John Arthur Smith, D-Deming, said his wife, a retired educator, often receives correspondence from the Educational Retirement Board boasting of strong investment returns and other positives.
But “I think it’s time the beneficiaries become aware that their pension is not in good shape,” Smith said. “I think it’s time we be very, very candid with people.”
Other legislators said they want the Public Employees Retirement Association and Educational Retirement Board to propose solutions soon, in time for the Legislature to analyze them ahead of the 60-day session that begins in January.
Top executives at both PERA and ERB have said they expect to have plans to improve the retirement systems’ fiscal footing ready for lawmakers later this year.
“We have to fix the problem … or our bond rating is going to drop again,” said Sen. George Muñoz, D-Gallup.
Moody’s Investor Service downgraded the state’s bond rating this summer, citing pension liabilities as one factor.
Lawmakers kicked around a variety of ideas Thursday – from overhauling the governing boards that oversee the PERA and ERB to scaling back the cost-of-living raises that retirees get.
In a report released Thursday, analysts working for the Legislative Finance Committee said New Mexico’s pension systems “remain significantly under-funded.” The unfunded liabilities of PERA and ERB now stand at roughly $12.5 billion – a figure that will continue to grow unless significant changes are made, the LFC report said.
The unfunded liability is the difference between promised benefits and the amount on hand now to pay for them.
“It has become clear the current benefit structure is unsustainable and further refinement of the pension systems is needed,” the LFC report said.
New Mexico’s pension plans – the details of which vary for firefighters, teachers and other classes of employees – “are significantly more generous than plans across the nation,” analysts said. On the other hand, the percentage of salary that employees and employers contribute to the plans is relatively high, the report said.
The underfunding of the pensions isn’t necessarily the fault of the Public Employees Retirement Association or the Educational Retirement Board. The contribution rates for employers and employees are set by state law, and the basic terms of how the pensions operate are out of their control.
There are also legal limits on what benefits can be changed.
Wayne Propst, executive director of PERA, didn’t downplay the problem as he addressed legislators. About two-thirds of his fund’s current liabilities are to retirees, not people active in the workforce, he said.
“We have a math problem at PERA,” Propst told lawmakers gathered at the Taos branch campus of the University of New Mexico.
Jan Goodwin, executive director of the ERB, put it this way: The number of active members in her pension system is declining, even as the number of retirees increases. People are living longer, she said, but the size of the education workforce in New Mexico isn’t growing.
Neither pension system is making the annual required contribution, or the amount that needs to be set aside today to pay for the benefits accumulated. The last time they did, Goodwin estimated, was in the 1990s.
Propst warned that his fund cannot generate enough through investments to catch up. In fact, the association has scaled back its assumptions about its investment returns.
He walked legislators through a variety of potential changes that could improve the fund’s financial position, though he cautioned that he wasn’t necessarily recommending them, just explaining examples.
The ideas included increasing the percentage of salary that employees contribute to the retirement plan, suspending the cost-of-living adjustments for a period of time and adding cash from the state budget.
Nearly 87,000 retirees are now members of PERA or ERB. Their average age at retirement is 61 or 62.
The average ERB annual benefit is about $23,472, and the PERA average is $28,642.
The combination of a number of factors – including the cost-of-living adjustments and generous employer contributions – “results in New Mexico providing among the richest retirement benefits in the nation,” the LFC report said.