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

SPONSOR Varela

DATE TYPED 02/07/05 HB HJM 5

SHORT TITLE Public Retirement Expansion Moratorium

SB

ANALYST Geisler

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

See narrative Recurring

Educational Retirement

Fund, Public Employees

Retirement Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates: SJM 18

Conflicts with SB 266, SB 507, HB 287, HB 288

SOURCES OF INFORMATION

LFC Files

Educational Retirement Board (ERB)

Public Employees Retirement Association (PERA)

SUMMARY

Synopsis of Bill

House Joint Memorial 5 is Legislative Finance Committee sponsored legislation that proposes a

two-year moratorium on benefit enhancements proposals to the public employees and educa-

tional retirement systems be imposed through December 31, 2006.

Significant Issues

1.

The actuarial position of both the Educational Retirement Fund and the Public Employees

Retirement fund has declined in recent years.

•

ERB’s funded ratio, the actuarial value of assets as a percentage of actuarial accrued li-

abilities, declined from 81% to 75% in the last year. The funding period for their un-

House Joint Memorial 5 -- Page 2

funded actuarial liability, which the Governmental Accounting Standards Board (GASB)

states should be less than 30 years, is infinity. During FY 04, contributions of $356 mil-

lion were $95 million less than distributions of $451 million.

•

PERA’s actuarial position is still strong, but it has also declined in recent years. For ex-

ample, at June 30, 2004 their funded ratio was 93%, but it has declined 10% from the

FY 02 funded ratio of 103%. The funding period for PERA’s unfunded actuarial liability

increased from 17 to 21 years in the past year.

2. There have been a number of legislative changes in recent years which may have a negative

impact on the pension funds and there are new proposals for enhanced pensions before the legis-

lature this year.

•

There is concern that the elimination of income limits in 2003 on PERA retirees returning

to work is encouraging earlier retirements, which may have a long term negative impact

of the solvency of the PERA fund because of increased payouts to retirees and reduced

contributions to the fund.

•

Bills have been introduced in 2005 to provide for enhanced retirements for juvenile cor-

rection officers and conservation officers. Other bills propose to enhance the ERB re-

tirement multiplier and cost of living adjustments.

3. PERA and ERB have an actuarial target return of 8% on their investments. Over the next five

years and likely longer, it is a widely held belief in the investment community that returns are

going to be modest, which poses significant challenges to the investment staffs of both funds.

Another significant market downturn could cause a rapid deterioration in the actuarial position of

both funds.

House Joint Memorial 5 is endorsed by the boards of both PERA and ERB.

FISCAL IMPLICATIONS

Delaying additional benefit enhancements is likely to have a positive actuarial impact on ERB

and PERA. It will also allow for proper and thorough actuarial studies to be performed by the

actuaries of each system to determine their soundness and provide specifics for the legislature to

include proper funding as required by Article 20, Section 22 of the New Mexico Constitution.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Duplicates Senate Joint Memorial 18. Conflicts with Senate Bill 266, which proposes to provide

a benefit enhancement for juvenile correctional officers and Senate Bill 507, which proposes to

provide a benefit enhancement for conservation officers. Also conflicts with House Bill 287,

which proposes to enhance the ERB pension plan and House Bill 288, which proposes to en-

hance the cost of living adjustment for ERB retirees.

House Joint Memorial 5 -- Page 3

OTHER SUBSTANTIVE ISSUES

Response to ERB Solvency Problem

By seeking a delay in near-term benefit enhancements, House Joint Memorial 5 complements a

number of bills seeking to improve ERB’s solvency. SB 181 and HB 270 both propose increas-

ing employer contributions into the fund, with SB 181 also proposing a new, less costly retire-

ment plan. With the objective of increasing future investment return, HB 55, HB 389, SB 392,

and SB 60 seek to increase the flexibility of investing agencies (including ERB) by eliminating

legal lists of allowable investments and allowing investments to be governed by the Uniform

Prudent Investor Act (UPIA). SB 61 and HB 387 seek to reduce the time delays investing agen-

cies face in hiring and firing investment managers by exempting the investing agencies from the

procurement code when they procure investment related services.

On January 24, 2005, Governor Richardson appointed a task force of financial experts and legis-

lators to recommend solutions to the educational retirement shortfall and report back in 30 days.

Recent History of PERA Benefit Changes

The retirement benefits afforded to public employees of the State of New Mexico are among the

most desirable nationwide, and need to be protected from further erosion. During the past dec-

ade, the Legislature has increased the benefit structure available to certain public employees

groups by reducing normal retirement. For example, legislative proposals providing benefit en-

hancements for adult correctional officers and municipal detention officers have been enacted.

In the past year, the following employee groups have either requested or inquired about actuarial

studies to determine the cost of 20-year retirement plans or plans to enhance service credit by

20%:

District Attorneys

Public Defenders

911 Emergency Communication Workers

Dept. of Transportation/ Public Safety – Motor Transportation and Special Investigators

Children, Youth and Families Department – Juvenile Correctional Officers, Psychologists

and Caseworkers

Corrections Department – Probation and Parole Officers

New Mexico Conservation Officers Association – Commissioned Officers

Municipal Electrical Line Workers

Since removal of its earning limitation for retirees who return to work with affiliated-public em-

ployers, PERA has experienced historically heavier end-of-year retirements. For example, for

the year 2004 PERA retired 1,878 of its members. The number of back-to-work-retirees has es-

calated from 363 on October 31, 2003 to 1,501 through December 31, 2004. The number of re-

tirees who have returned to work correlates very closely with the increased retirements in 2004

and represents approximately 7% of annuitant payroll. Under current law, retired member contri-

butions will continue to be required through December 31, 2006, allowing for two full years of

actuarial experience to determine the full actuarial cost of PERA’s expanded return-to-work pro-

visions. Beginning January 1, 2007, the employer contribution rate will be adjusted annually at

the determination of PERA to cover the full actuarial cost of PERA retirees for post-retirement

employment with PERA affiliates. It is unknown whether removal of the earnings limitation for

House Joint Memorial 5 -- Page 4

post-retirement employment will require PERA’s actuaries to modify the retirement trend as-

sumptions used for valuation purposes. Until PERA’s actuaries have sufficient experience to

determine the actuarial cost of the return-to-work provisions, it is unknown what impact removal

of the earnings limitation has had on the Fund. As it pertains to PERA, House Joint Memorial

5’s two-year moratorium on benefit enhancements will coincide with the sunset of the PERA

Act’s provision requiring retired member contributions through December 31, 2006, allowing for

two full years of actuarial experience to determine the full actuarial cost of PERA’s return-to-

work provisions;

Article 20, Section 22 of the Constitution of the State of New Mexico requires that the PERA

Board and its independent actuary must establish funding periods for benefit enhancements that

reflect sound actuarial principles and cover the cost of new benefits. Benefit enhancement legis-

lation that does not reflect the cost of new benefits may carry with it a multi-million dollar

UAAL that will negatively impact the overall funded status of PERA.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

There will continue to be a proliferation of legislative proposals to enact benefit enhancements

from different employee groups and special interests.

GG/sb