Copyright © 2019 Albuquerque Journal
SANTA FE – A coalition of retirees is turning to an unusual argument as it pushes back on plans to overhaul New Mexico’s underfunded pension system for public employees.
The retirement system, they say, doesn’t actually need to reach full funding.
It’s a contention that puts the coalition at odds with the goal of a pension solvency task force established by Gov. Michelle Lujan Grisham.
In creating the task force this year, she noted that the pension fund had rung up $6 billion in unfunded liabilities – a figure that has contributed to downgrades in the state’s credit rating. She asked for recommendations to push the state to 100% funding within 25 years.
The funded ratio – the plan’s assets divided by its liabilities – is now about 70%.
Some retirees say full funding isn’t necessary, citing academic research published by the Brookings Institution, a Washington, D.C.-based think tank.
In a 70-page paper, the authors said the presence of unfunded liabilities doesn’t necessarily mean a pension plan is unsustainable.
“Overall, our results suggest there is no imminent ‘crisis’ for most pension plans,” authors Jamie Lenney of the Bank of England, Byron Lutz of the Federal Reserve Board of Governors and Louise Sheiner of the Brookings Institution wrote in their report.
They added that pension plans “have always operated far short of full prefunding.”
Other experts in retirement plans say 100% funding is still a worthwhile goal.
Alex Brown, research manager for the National Association of State Retirement Administrators, said there’s broad consensus among actuaries, policymakers and professional groups that “plans should target full funding over a reasonable period of time.”
A typical goal, for example, would be to hit 100% funding within 25 to 30 years, he said.
“Failing to target full funding would expose a plan to a variety of additional risks,” Brown said.
In New Mexico, the debate centers on the Public Employees Retirement Association, which provides pensions to about 40,000 retirees. It’s one of the most generous pension plans of its kind in the country, officials say.
Differing views
Pension math isn’t necessarily straightforward.
The Public Employees Retirement Association in New Mexico, for example, has roughly $15.6 billion in assets. It isn’t in danger of running out of money in the next few years.
But employees and retirees have already earned benefits exceeding the assets on hand – creating $6.2 billion in unfunded actuarial accrued liability, to put it into technical terms.
The Brookings paper notes that pension plans throughout the country vary widely in their financial circumstances. But it says that generally, “pension debt can be stabilized with relatively moderate fiscal adjustments.”
The paper doesn’t specifically address whether New Mexico, in particular, should target a certain funding level.
The paper, however, says that New Mexico would exhaust the assets in its pension plan in 27 years under the most pessimistic scenario published by the authors. On the other hand, the plan might never exhaust its assets under some scenarios.
Miguel Gómez, a former Albuquerque city councilor who now works as executive director of Retired Public Employees of New Mexico, a nonprofit advocacy group, said the Brookings paper suggests New Mexico has plenty of time to address its pension funding.
Tinkering with the plan might be in order, he said, but it isn’t necessary to reach 100% funding within 25 years.
“It’s a myth out there that people have bought into,” he said.
He suggests setting a less ambitious goal, showing the credit rating agencies that New Mexico is taking serious steps to better fund its pensions but without creating unnecessary harm.
“Maybe we get to 85% funding in 40 years – it’s a lot less pain for everybody,” he said.
Not everyone interprets the Brookings paper as evidence for that approach.
Wayne Propst, executive director of the Public Employees Retirement Association and a member of the governor’s task force, said the paper itself notes that “many plans are not stable and a sizable share of plans will exhaust their assets within 30 years” under certain scenarios.
New Mexico is in that category, he said, as shown by the paper’s scenario showing the plan could exhaust its assets in 27 years.
New Mexico’s challenge, Propst said, is that the benefits offered to current retirees are more generous than those of any other similar-sized plan in the country. The Public Employees Retirement Association, he said, will pay out $1.3 billion in benefits this year while expecting to take in only $630 million in contributions.
“Selectively picking a few words from the report and saying New Mexico doesn’t have a problem is simply not correct,” Propst said. “The report clearly states that we’re one of these states that has a significant problem.”
Bond rating
Lujan Grisham and lawmakers, in any case, are facing pressure to shore up the pension plan’s finances.
Moody’s Investors Service cited New Mexico’s pension liabilities in 2018 when it downgraded the state’s bond rating, the state’s second downgrade in two years. And the rating agency mentioned pension concerns again earlier this year when it confirmed the lower rating.
The ratings can play a role in how much it costs the state to borrow money to build roads and handle other infrastructure projects.
Analysts for the state’s Legislative Finance Committee last year also warned lawmakers that “without significant reforms, the unfunded liability will continue increasing, further imperiling state finances.”
The issue may be debated in next year’s legislative session.
Lujan Grisham, a Democrat, established the solvency task force in February, the month after she took office. She directed the group to issue recommendations by Aug. 30.
The group is working on preliminary recommendations that call for reducing for three years the cost-of-living adjustment given to retirees – a move the task force said could decrease the pension system’s unfunded liability by $693 million.
Other ideas include requiring employees and government agencies to increase their contributions into the retirement system.
The Public Employees Retirement Association is one of two main pension plans in New Mexico. Teachers and other educators are covered by the other plan, operated by the Educational Retirement Board. It also faces questions about its funding levels.
Legislative action would be required to change the pension plans. The session begins Jan. 21.
