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

SPONSOR Campos

DATE TYPED 02/08/05 HB

SHORT TITLE Return to Work for Educational Retirees

SB 28

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

See Narrative

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

Educational Retirement Board (ERB)

SUMMARY

Synopsis of Bill

Senate Bill 28 provides that certain higher education employees employed by the universities

and colleges listed in Article XII Section 11 of the Constitution of New Mexico be granted a

special exception from the Educational Retirements Act’s (“ERA”) return to work (“RTW”) pro-

visions and be permitted to return to work immediately after retirement from ERA without hav-

ing to suspend retirement benefits.

All other members of the ERA system who retired after 2001 are required to wait one year from

retirement before they can return to employment and not be required to suspend retirement bene-

fits. Under Senate Bill 28 an employee would be eligible for this no-wait provision if they do

not violate federal law to do so, their compensation does not come from the general fund and the

employee is “responsible for grants or awards to the institution in a total of $100,000 or more

annually.”

Significant Issues

According to ERB, the most significant issue is the cost to the ERA fund for providing the en-

hanced benefits as outlined in Senate Bill 28. ERA’s actuaries have indicated that any provision

that allows for an immediate return to work provision will entice members to retire earlier than

planned and such earlier retirement will mean that ERB will pay a larger benefit over the lifetime

Senate Bill 28 -- Page 2

of the member. This could mean a significant cost to the plan. While the bill calls for such cost

to be borne by the institution, the calculation of such costs would have to be made in each case, a

costly and time consuming project that would fall squarely on the agency.

A second significant issue is that ERB would be required to conduct an actuarial study for each

applicant, confirm where an administrative unit employee’s funding actually comes from and

verify that the member is not in violation of federal laws, particularly IRS regulations. This

would create a severe administrative burden on ERB. There is no appropriation for additional

ERA personnel to handle the increased duties this bill would create for the agency.

Also, problematic is the allowance of a select few ERB members to receive a special immediate

RTW while all other members have to wait one full year. This will most likely create rancor

among ERA members, or worse, initiate requests to grant similar benefits to all ERB members,

(even those in the pubic schools who receive some federal funding), or open the door for abuse

of the provisions by funneling compensation through third party payors.

ERB’s actuaries have determined that the fund has a $2.4 billion shortfall in its actuarial liabili-

ties and therefore the Educational Retirement Board had voted to oppose benefit enhancements.

FISCAL IMPLICATIONS

There would be costs due to the early retirements and increase in administrative duties required.

While the bill says that the actuarial costs could be recovered by the agency, the burden is on

ERB to pay for an actuarial study each time a member applies for the provision under Senate Bill

28. ERB would have to pay for such costly studies regardless of whether the member eventually

entered this RTW provision

ADMINISTRATIVE IMPLICATIONS

The Agency will require additional rules and procedures for this select group of members. This

would entail how actuarial studies are to be solicited and the creation of complicated checks and

balances to monitor the information submitted to the agency from the employers to make certain

that all aspects of the law are complied with. This could increase significantly if there is the ex-

pected effort on the part of the rest of the ERA membership to lobby to receive the same en-

hanced no waiting period benefit for RTW to apply to them.

TECHNICAL ISSUES

The IRS has allowed a number of liberal retirement changes over the past few years. Some of

these changes, similar to the one proposed, have not really been tested in the courts. In other

words, there is no assurance that the bill could not run into difficulties with IRS interpretations of

their rules and regulations. ERB could ask the IRS for a private letter ruling, however that proc-

ess usually takes from one to three years to get a response

ALTERNATIVES

Higher Education employers could use other methods of retaining this select group of employers

that does not cause the problems to the retirement fund as stated above.

Senate Bill 28 -- Page 3

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

UNM officials claim that they will lose some faculty to out of state institutions when these fac-

ulty reach the requirements for a full retirement under the ERA system. For ERB, not passing

this bill will relieve the problems it could cause as stated above.

GG/sb