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.