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Experts suggest fixes for state pension plans

Copyright © 2019 Albuquerque Journal

SANTA FE – Actuaries and financial experts on Thursday outlined a series of stark risks to New Mexico’s underfunded pension systems for public employees.

In a hearing at the Capitol, they encouraged a new task force established by Gov. Michelle Lujan Grisham to prepare for the possibility of poor investment returns or other circumstances that could damage the health of the pension system even beyond what’s now projected.

But they also suggested consideration of some options for improving the health of the pension funds – such as making cost-of-living adjustments for retirees contingent on investment gains.

Still more possibilities include enlarging the state workforce by 10%, requiring bigger contributions from employees and employers, or injecting, say, $200 million cash into the pension system.

The ideas came in the first public meeting of a 19-member task force charged with making recommendations to Lujan Grisham by late August. Proposed changes to New Mexico’s pension system could be considered in the next legislative session, which will start in mid-January.

“We need to find a model that fits New Mexico,” said Diego Arencón, a former Albuquerque firefighter and union leader who now works in the Governor’s Office.

Retirees, meanwhile, turned out in force Thursday to urge the task force to reject any push to curtail the benefits to people now drawing pensions. Some who testified said the pension was an important part of why they worked for a government agency, accepting less pay than they believed they could have earned in the private sector in exchange for a good pension upon retirement.

“Let’s not take draconian measures,” said Miguel Gómez of Retired Public Employees of New Mexico, an advocacy group. “Retirees depend on their (cost-of-living adjustment) for basic living expenses.”

Loretta Naranjo-Lopez, a retired Albuquerque city planner and board member for one of the state pension systems, said changes to the cost-of-living adjustment shouldn’t be up for consideration.

“The brunt shouldn’t be on the retirees,” she said.

Actuaries who analyzed the pension system for the task force said a balanced approach should be used to shore up the finances of the pension funds. Some of the ideas they analyzed – such as reducing future benefits for active employees – wouldn’t necessarily make a big difference, they said.

But John Garrett, an actuary who has consulted for pension systems throughout the country, said Thursday that at least six states have a “risk-shared” cost-of-living adjustment.

Instead of retirees getting an automatic increase in their pensions every year, he said, the award of a cost-of-living increase is contingent on investment performance or certain other benchmarks.

It can make a big difference, Garrett said, because most of the pension liabilities are tied to people who are already retired, not future retirees.

“The idea is, in risk-sharing, you’re paying COLAs when the gains are there to pay them,” he said.

No one from the task force explicitly embraced or criticized the idea.

The group has three more work sessions scheduled for this summer, then another public meeting scheduled at 10 a.m. Aug. 9 in the Capitol, Room 307.

The system that covers police, firefighters and a variety of other civil servants – known as the Public Employees Retirement Association – has a roughly $6 billion unfunded liability. A similar pension program for teachers and educators is similarly underfunded.

Pension liabilities, in fact, have already prompted a national credit rating agency to downgrade the state’s bond rating.

Much of Thursday’s discussion centered on how the pension plans might actually be in worse shape than now projected.

The Public Employees Retirement Association is projecting annual investment returns of 7.25%, which is in line with the national standard, the actuaries said.

But just one bad year could significantly alter the health of the fund, they said, and the state should prepare for a wide range of possible investment returns each year, even if they ultimately average 7.25% over the long term.

Dominic Garcia, chief investment officer of the Public Employees Retirement Association and a member of the task force, said the 7.25% rate is a “rosy scenario.”

“We need this system to be resilient to bad outcomes,” Garcia said.

About 40,000 retirees now draw pensions from PERA, and about 50,000 employees are working and paying into the system.

Most of the retirees get an automatic 2% cost-of-living increase every year.