NOTE:  As provided in LFC policy, this report is intended only for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used for other purposes.

 

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F I S C A L   I M P A C T   R E P O R T

 

 

 

SPONSOR:

Kernan

 

DATE TYPED:

3/14/03

 

HB

 

 

SHORT TITLE:

Allow Return to Employment in Education

 

SB

283/aHEC

 

 

ANALYST:

Neel

 

 

REVENUE

 

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY03

FY04

 

 

 

 

NFI

 

 

 

 

 

 

 

 

(Parenthesis ( ) Indicate Revenue Decreases)

 

Relates to:

HB 22, Educational Retirement Benefits

SB 136, Educational Retirement Benefits

SB 169, Increase Educational Retirement Multiplier

SB 174, Amend Educational Retirement Act

SB 136, Educational Retirement Benefits

 

SOURCES OF INFORMATION

 

LFC files

 

Responses Received From

Educational Retirement Board (ERB)

 

SUMMARY

 

     Synopsis of HEC Amendment

 

The House Education Committee amendment allows ERA members who:

 

  • are retired prior to January 1, 2001;
  • have not been employed as an employee or independent contractor of a local administrative unit for at least 90 days;
  • upon initial retirement was not employed by a local administrative unit for 12 months.

 

… to begin employment at a local administrative unit without suspending retirement benefits.

 

     Synopsis of Original Bill

 

Senate Bill 283 amends the “Return to Work” provision in the Educational Retirement Act, which passed in the 2001 legislative session (Laws 2001, ch. 283, § 2.), to allow retirees retired prior to January 1, 2001 to return to employment with a school district without the loss of their respective retirement benefits.    The retirees are prohibited from employment as an employee or contractor by a school district for at least 90 days prior to reemployment and must be previously retired for a minimum of 12 months.  

 

     Significant Issues

 

According to ERB, the 90 day layout period is required by IRS regulations and cannot be part of a break or vacation period.   The layout period must be consistent with a resignation, termination and rehire. 

 

FISCAL IMPLICATIONS

 

ERB does not note a fiscal impact

 

OTHER SUBSTANTIVE ISSUES

 

Actuarial Valuation.  The unfunded actuarial accrued liability (UAAL) calculation is used to help assess a pension fund’s status and progress toward accumulating the assets needed to pay benefits as due.  It is the difference between total actuarial liabilities and the total actuarial value of assets.  The funding period (or amortization period) is measured in years and is the time it takes to finance the unfunded actuarial liabilities under the current funding policy. General Accounting Standards Board (GASB) Statement No. 25 states amortization periods for UAALs should not exceed the estimated total service life of the employee group.  GASB believes that period, for most employee groups, is not more than 30 years. 

 


As the below table illustrates, ERB’s funding period now stands at 27.2 years, up from last year’s funding period of 12.5 years.  The increased funding period is due in part to a combination of higher salaries and investment losses. ERB’s percent funded declined from 91.9 percent to 86.8 percent as of June 30, 2002, while the UAAL increased from 652 million to $1,152.8 million. 

 

At the end of FY02, ERB’s actuarial report deferred $1.58 billion in investment losses.  This

equates to approximately $395 million in losses being absorbed the Educational Retirement Fund (ERF) for each of the next four years.  Based on the ERF value of $5.6 billion, the fund will need to return 7 percent to maintain its current value not to mention the long-term actuarial growth assumption of 8 percent. 

 

Compounding ERB’s investment and liability losses are cash-flow constraints with being a mature fund.  Designation as a mature fund is defined as paying out more in benefits than the fund receives in contributions from its members.  ERB received $328.6 million in FY02 contributions, while paying $396 million in benefits and refunds. Therefore, there was a net loss in the fund of $68 million for normal operation of the fund.  

 

TECHNICAL ISSUES

 

The original “Return to Work” legislation was designed to induce teachers to return to the classroom to help ameliorate the teacher shortage in New Mexico.   The one-year layout requirement served two purposes: (1) to meet IRS regulations, and (2) keep the legislation fiscally neutral. 

 

SN/prr:yr