The governor’s recent proposal regarding PERA is particularly alarming and galling because it is completely unnecessary.
Her idea is to cobble together over $6 billion in just 25 years to fully prefund one of New Mexico’s two large public pension funds. She is not proposing to do the same thing with the other fund, which has an even worse funding ratio.
There are almost 4,000 public pension funds around the country and only a handful are 100% funded. In aggregate, these funds have always operated far short of full prefunding.
What’s going on? Quite simply, it has become the mantra of some pension fund administrators, financial consultants that benefit from such schemes and ideological zealots that government pension funds should be 100% funded. These individuals are wrong. A recent report from the highly respected Brookings Institution, “The Sustainability of State and Local Government Pensions: A Public Finance Approach,” debunks this false narrative. Tom Sgouros also discusses these issues in his 2017 report for the Haas Institute at the University of California, Berkeley.
Not only is it not necessary for these funds to achieve 100% funding, there are serious risks in attempting to achieve full prefunding. Funds attempting to reach full prefunding generally take more risks in their investment portfolios. Most importantly, trying to achieve full prefunding, especially over a relatively short period, requires significant sacrifices and financial pain. This includes cuts to retirees’ COLA benefits, increases in contribution rates and significant subsidies from state government, all elements of the governor’s proposal.
The Brookings report argues for sustainability and a pay-as-you-go (PAYGO) model, rather than full prefunding. The authors make a compelling case not to fully prefund public pension funds, especially in today’s low-interest rate environment. In addition, there is almost no advantage to starting the stabilization process immediately as opposed to years in the future.
It is worth noting that PERA has not met its own performance benchmarks for several years, during a time of record stock market highs. A new study also found that PERA is among the worst-performing public pension funds in the Southwest over the past decade.
There should be a fair and honest process to address PERA. We envision a process where independent expert consultants analyze multiple models and seek extensive public input in a transparent and collaborative manner. The Legislature should issue an RFP to analyze models that run the full gamut of options. They should consider ideas such as reducing the annual multiplier as well as closely look at the individual funds or divisions within PERA, as several divisions are underfunded while others are fine or overfunded.
There is no immediate crisis. In the private sector, pensions should probably be 100% funded to protect workers in case of bankruptcy. Governments, on the other hand, may encounter periodic difficulties due to economic cycles and fluctuating revenues, but they are generally not going to declare bankruptcy and go away. Current employees help pay the benefits of current retirees and this cycle continues indefinitely, much like social security.
Fully prefunding public pension funds amounts to covering the total future benefits of current retirees and workers, even young workers that have just started their careers and will not retire for several decades. The real question of a plan’s fiscal viability is whether it can continue to pay its obligations each year, not whether it can cover all future obligations today. We likely only need to reach a funding ratio of 70-80% to achieve complete stability and sustainability.
It is much more important to have a plan that attempts to reach sustainability over a long period rather than have a quick fix that may be overly burdensome to one generation or group. The current proposal will create lasting divisions and resentment and embarks New Mexico on a path most commonly advocated by ideological zealots rather than our traditional path of consensus and working together as one community.