Sunday, July 04, 2010
Pension Plan Needs Overhaul
By Dan Boyd
Copyright © 2010 Albuquerque Journal
Journal Capitol Bureau
SANTA FE — You start work at age 22. After putting in 25 years, making mandatory pension contributions all the while, you're eligible to retire at 47.
For the rest of your life — perhaps another 40 years — you will get a monthly check amounting to nearly 60 percent of the paycheck you pulled in during your highest-earning years. And that's not counting Social Security.
Or maybe you put in a few more years of work and the pension benefit goes to 80 percent.
Sound like a good deal?
But New Mexico's public pension funds, valued on the market at about $19 billion after investment losses in recent years, don't appear to be fat enough to keep on paying out those generous pension benefits indefinitely — despite recent legislative fixes.
"The economy has gone to hell, and we can't sustain it anymore," said Senate President Pro Tem Tim Jennings, D-Roswell, of the currently defined pension plans. "We've got to make some changes."
Those changes could include taking more from employees' paychecks, placing more market investment risk on employees' shoulders or spending more taxpayer money to bolster the programs.
The bottom line is this: Despite new eligibility requirements that took effect July 1 and require longer time in the workforce for fresh workers, more changes likely will be needed to address the state's $6.8 billion unfunded, actuarially accrued pension liability.
That unfunded liability — or the difference between the total bill coming due and the current assets on hand — means the state's two big retirement and benefit plans, the Public Employees Retirement Association and the Educational Retirement Board, already have more people enrolled and planning to retire than the plans can afford.
And with more than 117,000 active members of PERA and ERB who will eventually retire and expect benefits, it's a situation that will likely play out for years to come.
Changes worry workers
The prospect of eligibility and contribution changes makes state workers and teachers, such as Sara Attleson, who's been a librarian at Kennedy Middle School in Albuquerque for the past 32 years, increasingly nervous.
"I've been working my whole life for a low salary," Attleson said. "But to this point I've always said, 'At least I've got a nice retirement.' "
While benefit payments for at least the next several decades don't appear to be at risk, PERA and ERB are looking at new ways to meet long-term obligations.
PERA likely will ask the Legislature next spring to approve increased contribution rates from employees and employers to up the amount of money flowing into the plan.
Meanwhile, pending employer contribution increases for the ERB were delayed last year by lawmakers due to sagging state revenues.
Even those changes might not be enough.
With employees living longer and retiring earlier, more drastic measures could also be considered by lawmakers.
"You either have to put more money into the pension fund or you have to change the benefits," said Rep. Donald Bratton, R-Hobbs, during a recent meeting of the Legislative Finance Committee. "We've got to be realistic. You can't work for 20 years and retire for 40 or 50."
What's at stake
The fight over pension costs isn't unique to New Mexico.
States from California to New York are taking aim at public pensions, which provide monthly retirement checks for public workers who have put in a required amount of work time. According to the National Conference of State Legislatures:
• Two states — Colorado and Minnesota — have already cut annual cost-of-living pension increases for current workers and retirees. Both states have since been the target of lawsuits from retirees.
• Illinois has raised its minimum retirement age to 67 and has capped its annual pension benefits at slightly more than $100,000.
• Starting next year, Mississippi will require new employees to work for 33 years instead of 30 years to be eligible for full retirement benefits.
"What states are talking about is, does it make sense that some people are working for less time than they're retired?" said ERB Executive Director Jan Goodwin.
A Pew Center on the States study released earlier this year found that New Mexico had a $4.5 billion unfunded pension liability in 2008.
That figure increased to $6.8 billion last year, according to the most recent data compiled by PERA and ERB.
With the recent increase, the state's unfunded pension liability is now larger than its $5.6 billion budget for the fiscal year that started July 1.
The state's pension plans have gone from being more than 90 percent funded in 1999 to less than 83 percent funded in 2008. They were graded by the Pew study as "needs improvement."
In all, the state's total pension liabilities — or the bill that's only partly covered currently — stand at $28.8 billion, or more than El Salvador's gross domestic product.
Unlike some states, New Mexico doesn't have a minimum retirement age and individuals covered by the ERB don't have a cap on how much in monthly benefits they can receive.
Some retirees actually receive much more than 60 percent of their salary in pension payouts, as there are several different retirement eligibility paths at both PERA and ERB. The formula used to determine pension benefits depends on a number of factors, such as number of years on the job and the age at which someone retires.
For example, a PERA employee who has worked 30 years and retires at age 60 will receive 80 percent of his or her paycheck — the maximum allowable rate for most plans — after retiring.
However, while the Pew study's findings suggest the need for imminent change, pension officials also harbor a concern that overhauls could go too far.
"I don't want to be getting into a worst-case, long-term situation where you have scores of senior citizens who don't have the financial resources they need," Goodwin said.
Many teachers and state workers say they're counting on the state to honor its promise of paying full pension benefits.
Attleson pointed out that New Mexico lawmakers have already approved a temporary 1.5 percent increase in employee contribution rates designed to help the state cope with the ongoing budget crunch.
"My feelings are we have been singled out as a group," she said.
A new model?
Many private sector companies have fundamentally changed how they offer retirement benefits in recent years.
Instead of defined benefit plans, in which employees are guaranteed to receive a set monthly pension check based on the length of their career and their salary, the private sector has largely switched over to a defined contribution model — exemplified by a 401(k) plan — in which employees bear the brunt of marketplace volatility.
Paul Gessing, president of the Albuquerque-based Rio Grande Foundation, a think tank that favors a free market and limited government, said it's a model New Mexico lawmakers would be wise to consider.
In a study exploring New Mexico's unfunded pension and retiree health care liabilities released earlier this year, the Rio Grande Foundation recommended switching over to a defined contribution system as one of several ways to "fix" the state's system.
Other proposals included cutting the number of state and municipal employees and increasing employee contributions.
"Right now, you're putting the taxpayer on the hook for these employees benefits and that's not fair because taxpayers don't get this kind of sweetheart deal," Gessing said.
At least some legislators say defined contribution — which has already been adopted in Michigan and Alaska — is a system New Mexico should consider.
"I think that's real possible," Jennings said.
But labor unions are adamantly opposed to the concept.
"At least with a pension, it's something you can count on," said Josh Anderson, political coordinator for the American Federation of State, County and Municipal Employees Council 18, which represents more than 12,000 New Mexico employees in different levels of government. "Having a retirement you can count on is significant to folks staying in the public sector."
"We don't have any faith in a defined contribution system," American Federation of Teachers-New Mexico President Christine Trujillo said. "It would just be chaotic."
Cheryl Jurewich, a second-grade teacher in Pecos, said she wouldn't have moved to New Mexico from Massachusetts seven years ago if she had known the state might implement a defined contribution system.
"The possibility of the Legislature changing (the current model) to a defined contribution system is scary to say the least," Jurewich said. "It's definitely something you go into thinking, 'OK, I'm going to put in my 30 years and I'll have a retirement waiting for me.' "
Both PERA and ERB depend on annual investment returns to bridge the gap between incoming contributions and outgoing benefit payments.
The funds' solvency revolves around an assumed 8 percent annual return, though losses and gains are averaged over time to "smooth" investments results for accounting purposes.
During 2008, when the stock market tanked, PERA's assets dropped from $13.3 billion to $8.9 billion, while the ERB's assets went from $9.4 billion to $6.6 billion.
Though both funds have since showed signs of recovery — PERA sat at $10.5 billion and ERB at $8.4 billion as of March 31 — the investment losses will put more pressure in upcoming years on state leaders to come up with long-term fixes.
ERB Board Chairman Bruce Malott said chasing an 8 percent annual investment return can lead to risky, and potentially volatile, investment decisions.
"I think in the world we live in today, how do you know you're going to be able to get that 8 percent?" Malott said.
If the investment target were to be lowered, however, that would require higher contributions or fewer benefits paid to offset the decrease.
So, can the state afford to hold up its end of an increasingly unsustainable bargain?
The Pew pension study described the combination of the 2008 investment losses with the ongoing decline in state and local tax revenues as the "perfect storm" for state governments.
If significant, and effective, changes aren't implemented, the state could end up having to pay for the retirement benefits of public-sector employees out of its general fund, which could cause deep cuts to basic government services.
"We need to step up and do it as soon as possible," Jennings told the Journal, referring to fiduciary changes. "Every day we wait, it's just pushing it down the road."
PERA Executive Director Terry Slattery said the pension fund is positioned to pay retirement benefits for years to come.
However, Slattery also said new recommendations — including potential contribution increases — could be presented to an interim legislative committee as early as this month.
"Times have changed, and there's not as much money to pay for these pensions," Slattery said.
In other words, future teachers and state workers probably won't be able to count on the same retirement benefits as current and past employees. Looking ahead, that could mean two separate plans — one for current employees that uses the current eligibility guidelines and benefits and another for soon-to-start employees that would feature more stringent eligibility requirements and lower cost-of-living increases.
AFSCME political coordinator Anderson acknowledges changes may have to be made, but said the union will fight to protect benefits for those who entered under today's rules.
"We want to make sure we protect the current folks," Anderson said.
Gessing, however, said that while the circumstances are different, it's worth looking at Greece and other European countries that are teetering on the brink of economic ruin as proof of the economic danger of overly generous public pensions.
"The numbers simply don't add up," Gessing said. "We need to take those lessons to heart and implement these reforms before it's too late."