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

SPONSOR Beffort

ORIGINAL DATE

LAST UPDATED

01/31/06

2/9/06 HB

SHORT TITLE Increase Educational Retirement Contributions

SB 541

ANALYST Geisler

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

1,239.5

9,772.5 Recurring Educational Re-

tirement Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to: SB 206, SB 300 and HB 100

SOURCES OF INFORMATION

LFC Files

Responses Received From

Educational Retirement Board (ERB)

SUMMARY

Synopsis of Bill

Senate 541 seeks to improve the actuarial solvency of the Educational Retirement Fund by in-

creasing member contributions to the fund as follows: FY 2007, from 7.75 percent to 7.8 per-

cent; FY 2008, from 7.825 percent to 8.2 percent; on or after July 1, 2008, from 7.9 percent to

8.6 percent.

FISCAL IMPLICATIONS

This bill will improve the actuarial position of the ERB by providing for increased contributions

from current employees. The chart below shows how the contribution rates will change and the

additional revenue:

Senate Bill 541-- Page

2

Fiscal Year

Member Contribution

Rate under Current

Law (SB 181)

Member Contribu-

tion Rate under SB

541

Additional Revenue

from SB 541 (000’s)

FY 2007

7.750%

7.8%

$1,239.5

FY 2008

7.825%

8.2%

$9,772.5

FY 2009 and thereafter

7.90%

8.6%

$18,991.0

When the contribution rate increase is fully phased-in during FY 09, it will bring in $18.9 million

more in recurring revenue.

ERB’s actuaries project that employee contribution rate increases in SB 541 will improve ERB’s

solvency as follows:

•

ERB will reach the 80% funded ratio at the end of FY17, two years earlier than currently pro-

jected.

•

ERB will have a funding period of 25.2 years to amortize its unfunded actuarial liability at

the end of FY11, an improvement over the current projection of 29.2 years at the end of

FY11.

•

The actuarially required contribution (ARC) would decrease from 12.86% to 12.20% of pay-

roll in FY12. The ARC represents the required employer contribution to pay benefits for cur-

rent employees and to amortize the unfunded actuarial liability (UAAL) within 30 years.

SIGNIFICANT ISSUES

The higher employee contributions implemented by SB 541 will improve ERB’s solvency but

will lead to a reduction in teacher take home pay. The ERB annual payroll deduction for a

teacher earning $40,000 would be $3,440 under SB 541, an increase of $220 over the current rate

for FY09 in statute.

According to ERB’s actuary, ERB in FY05 had one of the highest employee contribution rates of

any teacher pension plan before the increases in SB 181 and additional increases proposed by SB

541. ERB’s actuary also notes that the existing contribution rate for ERB employees correlates

to a better benefit structure than many other teacher pension plans. However, ERB’s benefit

structure is less generous that the state employees retirement plan in NM (PERA). Educational

employees currently contribute 7.675% in FY06, compared to the state employee contribution

rate of 7.42% of pay.

ADMINISTRATIVE IMPLICATIONS

ERB notes that there may be some administrative issues with carrying out other aspects of this

bill due to ERB’s current retirement information systems. There would be some cost to repro-

gram the system.

OTHER SUBSTANTIVE ISSUES

SB 181 passed during the 2005 session will increase employer contributions to ERB over seven

Senate Bill 541-- Page

3

years at a cost of approximately $150 million. The employer contribution rate will increase .75

per year, which will take the contribution rate from 8.65% in FY05 to 13.90% in FY12.

Employee contributions will increase .075 per year, which will take the contribution rate from

7.6% in FY05 to 7.90% in FY09. With these contribution increases it is anticipated that ERB

will meet the 80% funded ratio actuarial benchmark by FY19 and will meet the 30 year GASB

standard for amortization of the UAAL by FY11. However, it is important to note that these ac-

tuarial projections are dependent on important assumptions on teacher pay growth, rate of re-

tirements, and 8% investment return holding firm.

RELATIONSHIP

SB 206 relates as it seeks to improve ERB actuarial solvency by changing the retirement eligibil-

ity rule for new hires starting in FY07 by moving to a rule of 80 (years of service + member age)

from the current rule of 75. SB 300 and SB 100 seek to improve ERB actuarial solvency by

changing the rules of the retiree return to work program.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

Current contribution levels would remain in place. The employer & employee contribution in-

creases implemented in SB 181 during the 2005 session will fix ERB’s underfunding issue, as-

suming actuarial assumptions on demographics, teacher pay, and investment return hold.

GG/mt