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

SPONSOR Snyder

ORIGINAL DATE

LAST UPDATED

02/04/06

HB

SHORT TITLE PERA Final Average Salary Calculations

SM 29

ANALYST Geisler

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

Unknown

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates: HM 34

SOURCES OF INFORMATION

Responses Received From

Public Employees Retirement Association (PERA)

SUMMARY

Synopsis of Senate Memorial

Senate Memorial 29 requests a study by PERA to assess the impact that would result from basing

an employee’s final average salary (used to calculate pension benefit) on the employee’s highest

salaried thirty-six months regardless of whether the months are consecutive. PERA shall report

its findings to the appropriate interim committee of the legislature in 2006.

FISCAL IMPLICATIONS

PERA provides that there will be staff time and actuarial consultant costs to complete this study

but they do not have an estimate.

SIGNIFICANT ISSUES

Currently, the calculation for determining a public employee’s pension is based on the highest

salary the employee received for any consecutive thirty-six month period. In some circum-

stances, this formula my disadvantage some employees whose salary histories have peak salary

periods that are not consecutive.

Senate Memorial 29 – Page

2

On the other hand, PERA notes that using an employee’s highest salaried 36 months, regardless

of whether the months are consecutive, may lead to the employee to “cherry-pick” their highest

36 months over their public employment career. For example, state workers are paid every 2

weeks and have 26 pay periods per year. Generally, there are two 3- pay period months each

year. Should this change in the final average salary calculation be enacted, it will undoubtedly

increase PERA's overall pension costs, possibly to the extent of requiring contribution increases.

Moving forward, the issue will remain on whether the proposed formula for calculating a public

employee’s final average salary is a benefit enhancement that conflicts with Article XX, Section

22 of the New Mexico Constitution (the legislature shall not enact any law that changes the fund-

ing formula for a retirement plan unless adequate funding is provided).

ADMINISTRATIVE IMPLICATIONS

PERA states that SM 29 will have a significant administrative impact on PERA. PERA’s only

means of assessing the impact on the Fund in changing the formula for calculating a member’s

final average salary is by manual audits on a random sampling of PERA members within 5 years

of retirement and calculate their final average salary under both methodologies. This work will

in large part be a manual task since PERA’s current pension administration system is pro-

grammed to calculate final average salary according to statute. PERA actuaries will then be re-

quired to assess the raw data to determine whether the proposed formula for calculating final av-

erage salary will have an impact on the fund.

Currently, PERA is experiencing a higher than usual backlog in member requests. Redirecting

staff to the assessment requested by SM 29 will result in additional staff workload.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SM 29 is a duplicated by HM 34.

GG/nt