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F I S C A L I M P A C T R E P O R T
SPONSOR Larra
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aga
ORIGINAL DATE
LAST UPDATED
1-24-07
HB 179
SHORT TITLE RETURN TO WORK FOR CERTAIN RETIREES SB
ANALYST Aubel
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
NFI
Educational
Retirement
Board
(Parenthesis ( ) Indicate Revenue Decreases)
ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)
FY07
FY08
FY09 3 Year
Total
Cost
Recurring
or Non-
Rec
Fund
Affected
Total
(Indeterminate)*
Recurring Educational
Retirement
Board
(Parenthesis ( ) Indicate Expenditure Decreases)
*See Fiscal Impact
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
See Fiscal Impact
Recurring
Public
Employees
Retirement
Association
(Parenthesis ( ) Indicate Revenue Decreases)
pg_0002
House Bill 179 – Page
2
ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)
FY07
FY08
FY09 3 Year
Total Cost
Recurring
or Non-Rec
Fund
Affected
Total
$50.0
$50.0
Non-
Recurring
Educational
Retirement
Board
(Parenthesis ( ) Indicate Expenditure Decreases)
Conflicts with SB 86, SB 184, SB 310, HB 313
SOURCES OF INFORMATION
LFC Files
Response Received From
Educational Retirement Board (ERB)
Public Employee Retirement Association (PERA)
Public Education Department (PED)
Administrative Office of the Courts (AOC)
SUMMARY
Synopsis of Bill
House Bill 179 amends the return to work (RTW) provisions of both the Educational Retirement
Act and the Public Employees Retirement Act by reinstating an earnings limitation of $25.0
thousand for retirees who initially return to work after July 1, 2007. Under this bill, pension
benefits are suspended and the employee is removed from retirement once this salary cap is
exceeded. In addition, it limits ERB members who retired prior to 2001 from entering RTW after
July 1, 2007. HB 179 retains the January 1, 2012 RTW sunset date for ERB.
Retirees who have returned to work prior on or before June 30, 2007 would continue in their
current status.
FISCAL IMPLICATIONS
PERA indicated that HB 179 may have a positive fiscal impact on its fund. It is assumed that the
ability for a retired member to return to work after retirement is a factor in a PERA member’s
timing of his or her retirement. PERA actuaries make assumptions regarding retirement trends
for actuarial valuation purposes. In general, actuarial experience indicates that members are
retiring at significantly higher rates during the first several years of service-based eligibility than
currently assumed. For instance, since removing the earning limitation for retirees who return to
work with affiliated-public employers, PERA has experienced historically heavier end-of-year
retirements. Reinstating the earnings limit may reverse or slow this trend, triggering later
retirements that would yield a gain to the fund.
PERA stated HB 179 will negatively impact its operating budget. Reinstating an earnings limit
will require PERA to make additional changes to its recently implemented computer
administration system. Every revision to the PERA Act’s RTW provisions results in a change
order with associated costs to PERA’s existing contract with the vendor. For example, by
pg_0003
House Bill 179 – Page
3
incorporating removal of the PERA’s post-retirement earning limit into the pension system,
PERA incurred approximately $50 thousand change orders during FY05. If further revisions to
the system are necessary in FY08, PERA will be required to seek a Budget Adjustment Request
to cover the costs of these system changes.
AOC noted that a positive impact may be realized by a PERA-affiliated employer who hires a
RTW employee (after the 90-day wait period is fulfilled) because the bill does not specify that
either employee or employer makes contributions to PERA up to the proposed $25 thousand
earnings limit. Such unfulfilled contributions would, therefore, be a loss to the PERA fund,
because current statute requires PERA-affiliated employers to pay the total actuarial cost of
RTW employees.
AOC also pointed out that a negative budgetary impact would be incurred by an PERA-affiliated
employer hiring a PERA during the 90-day sit-out period because the employer would be
required to pay the full actuarial costs to PERA, including both employer and employee portions,
as is the case currently for all PERA-related RTW employees. In this situation, the employee
would not accrue additional service time under this plan, which would be a positive fiscal impact
to the fund.
ERB noted that the latest actuarial report indicated there were no actuarial ramifications from the
current RTW program on the ERB fund to date and, therefore, does not anticipate any fiscal
impact on its fund due to actuarial experience if HB 179 is enacted.
SIGNIFICANT ISSUES
Currently, PERA has approximately 23,000 retirees; the number of retirees who have returned to
work represents approximately 10-12% of annuitant payroll. It remains unclear whether the
removal of the $15 thousand earnings limitation for post-retirement employment in 2003 will
require PERA’s actuaries to modify the retirement trend assumptions used for valuation
purposes.
NMSA 1978, Section 10-11-8(C)(2) provides that after December 31, 2006, no additional
member contributions shall be required from reemployed PERA retired members. Effective
January 1, 2007, PERA-affiliated employers that employ PERA retirees are required to make
employer contributions sufficient to pay the full actuarial cost as determined annually by PERA.
PERA’s actuaries determined the sum of the current employer and employee statutory rates as
sufficient to meet this actuarial cost to make the current RTW provisions cost-neutral to the fund.
Effective July 1, 2007, HB 179 would reinstate a calendar year earnings limitation of $25
thousand for post-retirement employment with affiliated-public employers. Upon reaching the
$25 thousand earnings limitation, pension benefits for those affected retirees would be
suspended, the former retired members would become contributing PERA members and would
accrue service credit until
employment terminates.
The earnings limitation proposed will not affect retired members who are already employed by
an affiliated-public employer on or before June 30, 2007. These already reemployed retired
members will be grandfathered in under existing law and their post-retirement employers will be
responsible for paying employer contributions in an amount equal to the sum of the statutory
employer rate and the statutory employee rate for the respective plan.
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House Bill 179 – Page
4
ERB has approximately 62,000 active members, 29,500 retired members, and approximately 925
members in a RTW status. Many ERB employers have used the RTW program to fill “hard to
replace" positions. This bill would limit a person from taking a full time job under RTW if the
yearly salary would exceed $25 thousand, severely limiting the use of RTW.
There is concern that the current system, which allows retirees to return to work without any
income limitations after sitting out year, is encouraging earlier retirements, which may have a
long term negative impact of the solvency of the ERB fund.
The original intent of the legislation was to help alleviate the teacher shortage by enticing retired
teachers to return to the classroom. The program was developed with the aid of ERB’s actuaries
who stated that the program would be actuarially neutral if retirees were required to wait one
year from retirement before returning to ERB employment. It was thought this would prevent
large numbers of members from retiring earlier than normally contemplated to take advantage of
a double stream of income.
Any provision that entices a member to retire earlier than normal means the fund will have to
pay out retirement benefits longer than was actuarially expected, thus having a negative effect on
the fund. As noted above, ERB’s actuaries have indicated that the RTW program has had no
negative actuarial effect on the ERB fund. That means that so far the program has not been a
financial burden to ERB. This, of course, could change in the future.
There has been some concern expressed that RTW programs have negatively impacted current
employee morale and upward mobility. There can also be a public perception problem of a
system which allows a member to receive both a salary and a pension.
PERFORMANCE IMPLICATIONS
PED has noted in the past that the return to work program has contributed significantly to
addressing New Mexico’s teacher shortage since 2001. Enacting any provisions that would
curtail the ability of ERB retirees to return to work would impact the gains made in addressing
this shortage. It is important to note that other strategies to increase and retain the teacher pool
have recently been implemented, such as the 3-tier salary schedule and the teacher mentor
program.
Neither PERA or ERB claimed any significant implications for their performance measures.
ADMINISTRATIVE IMPLICATIONS
PERA stated that HB 179 would have an administrative impact on PERA. Under current law it
is the employer’s responsibility to make contributions from the rehired retiree’s first day of
employment. HB 179 will require PERA to further reprogram its pension administration
computer system to return to an earnings limit for retirees who return-to-work after July 1, 2007.
HB 179 would again require PERA to track a retired member’s earnings threshold and
distinguish between post-retirement employment start dates.
In the short term, PERA will need to implement new electronic employer reporting procedures to
address the two different groups of retired members - those reemployed under the existing law
and those who reemploy after July 1, 2007. PERA anticipates employer reporting confusion
pg_0005
House Bill 179 – Page
5
regarding post-retirement employment in the short term.
ERB stated that the RTW program is difficult to administer. Adding another layer of complexity
to track the $25 thousand limit would be both hard to implement and enforce.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
HB 179 conflicts with Senate Bill 184, which accelerates the sunset date of the RTW program
for ERB from January 1, 2012 to June 30, 2008.
HB 179 conflicts with Senate Bill 310, which effectively ends the current RTW programs by
June 30, 2007 for PERA and ERB, one year earlier than SB 184, and substitutes a two-year
limited program commencing July 1, 2007. The provisions for PERA include a $15 thousand
earnings limit on any RTW PERA-affiliated employee not meeting specific requirements.
HB 179 conflicts with House Bill 313, which is the duplicate bill of SB 310.
HB 179 conflicts with Senate Bill 86, which proposes a $30 thousand earnings limit for PERA
retirees and also significantly lengthens PERA’s “sit-out" period from 90 days to 12 months, and
will make the 12-month “sit out" requirement applicable to independent contractors as well.
All bills have provisions to grandfather RTW retirees prior to the date of enactment contained in
the respective bills.
TECHNICAL ISSUES
HB 179 would amend Section 10-11-8 NMSA 1978 regarding PERA.
HB 179 would amend Section 22-11-25.1 NMSA 1978 and repeal Laws 2004, Chapter 2,
Section 1 regarding ERB.
ERB noted that it currently has statutes and rules that allow a retiree to work part-time and earn
up to $15,000 per year or .25 FTE, whichever is greater, without having to suspend retirement.
This program is separate from any specific RTW program. According to ERB, there would be
little reason to have this form of RTW program as set forth in HB 179 because the $25 thousand
earnings limit contained in HB 179 essentially duplicates this part-time employment allowance,
which is at most only $10,000 less than this RTW bill, and in some cases, where the .25 FTE was
employed in a $100,000 position, no different.
In addition, ERB noted that HB 179 does not contain language for ERB specifying what happens
when the earnings cap is reached and the pension is suspended. The status of the employee,
service credit accumulation and contributions would need to be defined.
OTHER SUBSTANTIVE ISSUES
HB 179 provides that those retired members who are “initially re-employed" before July 1, 2007
will be covered under existing law. It is PERA’s experience that retired members change
positions during their reemployment much like active members. PERA requires retired members
to submit termination notices and applications for certain changes in employment, such as
pg_0006
House Bill 179 – Page
6
movement across retirement coverage plans within the same employer or a change in state
agencies. If a reemployed retiree under existing law is required to submit a new application to
PERA because of his or her employment/position change after July 1, 2007, he or she will be
subject to HB 179’s proposed earnings limit.
PROPOSED AMENDMENTS
PERA proposed an amendment to HB 179, which would reinstate the elected-official exemption
for PERA retirees who are elected to office after July 1, 2007.
ALTERNATIVES
Several alternatives have been proposed, including maintaining the RTW program as currently
enacted, sunsetting the programs entirely, or replacing the current RTW programs with limited
versions to allow hard-to-fill positions be filled with retirees. Another option in this case is to
consider applying the provisions to PERA only.
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL
The current return to work program for ERB will continue until its statutory sunset date of
January 1, 2012. The current return to work program for PERA will continue indefinitely.
MA/mt