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

SPONSOR Stewart

DATE TYPED 02/01/05 HB 287

SHORT TITLE Increase Future Educational Retiree Benefits

SB

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$45,103.4

See narrative Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to: HB 288

Conflicts with: HJM 5, SJM 18, SB 181, HB 270

SOURCES OF INFORMATION

LFC Files

Educational Retirement Board

SUMMARY

Synopsis of Bill

HB 287 proposes to increase the benefits for future retirees covered under the Educational Re-

tirement Act (ERA). The present monthly retirement benefit for public school employees under

the (ERA), who retires at age 60 or over is 2.35 percent of the retiree’s average annual salary

multiplied by his number of years of service credit divided by 12. This bill would increase the

benefit factor as follows: on or before June 30, 2006, 2.465 percent; on or after July 1, 2006, 2.6

percent; on or after July 1, 2007, 2.775 percent; on or after July 1, 2008, 2.85 percent; and on or

after July 1, 2009, 3.0 percent. This bill appropriates $45.1 million in general fund (recurring) to

the Educational Retirement Fund for carrying out provisions of the bill.

Significant Issues

This bill seeks to create parity between the two state retirement plans when it comes to the calcu-

lation of the monthly benefit. ERB asserts that educational employee retirement benefits under

the ERA have substantially lagged behind the benefits earned by state employees under the Pub-

lic Employees Retirement Association (PERA). PERA employees in the main state plan cur-

House Bill 287 -- Page 2

rently contribute 7.42 percent of their salary while receiving a benefit that is based upon a multi-

plier of 3.0, while ERA employees contribute 7.6 percent of their salary, but are entitled to only

2.35 as a multiplier to determine retirement benefits.

However, the actuarial position of the fund has deteriorated and ERB has requested the legisla-

ture provide for a increase in the employer contribution rate to stabilize the fund. Enhancing the

benefit would increase current costs and increase ERB’s actuarial shortfall.

FISCAL IMPLICATIONS

According to the actuaries, the amount of new money that would be needed each year to fund

these increases is equivalent to a 6.3% increase in the employer contribution. For example in FY

06, the new money needed is $45.1 million, while in FY 07 the amount needed for that year

would be the recurring $45.1 million, plus an additional $46.2 million for a total of $92.3 mil-

lion. This bill appropriates only the $45.1 million per year, which would fall significantly short

of the amount required as determined by ERA’s actuary. The funding shortfall over the first five

years would be approximately $31.3 million.

The fund is currently experiencing a funding shortfall of over $2.4 billion to meets its liabilities

under the current set of benefits. The amounts as stated above include correcting this current

shortfall--an increase in the employer contribution of .75 for ten years and an additional em-

ployer contribution amounts needed to cover the increased benefits proposed under the bill. This

bill does not indicate or direct that the employer contributions must be increased, but ERB be-

lieves an increase must be included in statute to fund the proposed increase in retirement bene-

fits.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

This bill conflicts with HJM 5 and SJM 18 which propose a two year moratorium on all benefit

enhancements for both ERA and PERA. HB 270 and SB 181 call for an increase in employer

contributions to help meet the ERA funding shortfall without increasing employee retirement

benefits. HB 288 proposes to increase the ERA cost-of-living adjustment for retirees.

TECHNICAL ISSUES

ERB believes the bill would need to be amended to articulate the employer’s increase in contri-

bution in statute.

OTHER SUBSTANTIVE ISSUES

Without the proper funding required as determined by ERA’s actuary, such increases in benefits

would deplete the fund to such an extent that the fund could not pay retirement benefits as guar-

anteed by New Mexico statutes. The New Mexico Constitution requires in Article 20 §22 that

any benefit increases must be properly funded

.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The disparity between ERA and PERA pensions will continue

.

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