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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 02/22/05 HB

SHORT TITLE Retired Police Return to Work

SB 788

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

See Narrative

(Parenthesis ( ) Indicate Expenditure Decreases)

Conflicts with: HB 16, HB 207, SB 875

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public Employees Retirement Association (PERA)

SUMMARY

Synopsis of Bill

Senate Bill 788 would exempt retired state police members and retired municipal police mem-

bers from the PERA Act’s statutory 90-day separation from service requirement to temporarily

fill certain vacant public safety positions, which result from an active employee’s activation or

deployment to a federal call to active duty.

Significant Issues

Senate Bill 788 seeks to help the state and affiliated public employers fill law enforcement va-

cancies resulting from current members being called to active duty. However, PERA notes the

bill raises a number of policy issues: 1) whether the Internal Revenue Code requires a separation

in service when a retired member, who qualifies for normal retirement, returns to work with a

PERA-affiliated employer; and 2) does treating retired members differently result in prohibited

discrimination.

Senate Bill 788 -- Page 2

Nationally, public pension retirement systems uniformly require a separation from service when

a retired member returns to work with a PERA-affiliated employer. PERA State Police members

qualify for an unreduced, normal retirement benefit at any age when the member has reached 25

or more years of service. Certain Municipal Police members qualify for an unreduced, normal

retirement benefit at any age when the member has reached 20 or more years of service. Cur-

rently, there is a statutory 90-day separation from service requirement under the PERA Act’s re-

turn-to-work provisions. Therefore, a PERA retiree must “sit out” of PERA-covered employ-

ment for at least 90-days before returning to post-retirement employment, otherwise his or her

pension is suspended. See NMSA 1978, Section 10-11-8.

The Internal Revenue Service (“IRS”) has opined on certain arrangements that may be made

with respect to treatment of pension benefits in the case of continuous employment beyond the

normal retirement age. These include phased retirement programs, deferred retirement payments

and lump-sum payments. None are specific or binding on the ability of a public pension system

allowing for retired member, who qualifies for normal retirement, to immediately commence

post-retirement employment without a bona fide break-in-service. Without a definitive Internal

Revenue Service determination specific to this legislation, the public policy issue SB 788 at-

tempts to address does not outweigh the severity of the consequence relating to PERA’s loss of

its tax status as a governmental plan.

The exemption from the PERA Act’s 90-day separation from service requirement contemplated

would be available for retired state police members and retired municipal police members. Such

provisions must be uniformly applicable to all employees under similar circumstances so as not

to result in prohibited discrimination.

FISCAL IMPLICATIONS

Elimination of a break-in-service for retirees who return to work, under any circumstances, may

jeopardize PERA’s tax status as a governmental retirement plan under 401(a) of the Internal

Revenue Code. If PERA fails to meet the tax qualification requirements for a governmental

plan, its tax advantages are lost, the tax exempt status of plan earnings will be revoked, employer

deductions for contributions will be deferred or eliminated, PERA members will have to include

the value of vested plan contributions in gross income on their annual tax returns, and tax-free

rollover treatment will not be available. Obviously, a loss of any of these tax advantages would

have a substantial, negative impact on PERA and its members.

ADMINISTRATIVE IMPLICATIONS

PERA will be required to track the post-retirement contemplated by SB 788.

SB 788 will require certain affiliated employers and certain retired members to comply with

needed administrative procedures put in place to identify employment that is exempt from the

statutory 90-day “sit-out” period.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 16, applicable to all retired members who return to work with affiliated public em-

ployers, amends the PERA Act to reinstate an earnings limitation of $15,000 before suspension

of pension benefits.

Senate Bill 788 -- Page 3

House Bill 207, introduced on behalf of the Legislative Finance Committee, proposes to impose

a $30,000 earnings limit for PERA retirees who return to work for public-affiliated employers

for those retired members who return-to-work on or after July 1, 2005.

Senate Bill 875 would significantly lengthen the mandatory “sit-out” period before returning to

work by proposing a mandatory 12-month separation from service requirement for post-

retirement employment, including independent contractors. In addition, SB 875 raises the earn-

ings threshold earnings for retired member contributions to $30,000 and repeals the retired mem-

ber contributions sunset provisions.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

The PERA Act will continue to require that all PERA retirees must “sit out” of PERA-covered

employment for at least 90-days before returning to work, otherwise their retirement will be sus-

pended.

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