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

SPONSOR Trujillo

ORIGINAL DATE

LAST UPDATED

1-28-07

HB 304

SHORT TITLE Public Employee Cost Of Living Adjustment

SB

ANALYST Aubel

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

Significant *

Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

*See Fiscal Impact

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

$15.0

$15.0

Non-

Recurring PERA

(Parenthesis ( ) Indicate Expenditure Decreases)

Conflicts with SJM 6

SOURCES OF INFORMATION

LFC Files

Responses Received From

Public Employee Retirement Association (PERA)

Department of Corrections (DOC)

SUMMARY

Synopsis of Bill

House Bill 304 proposes to raise the cost-of-living adjustment (COLA) for Public Employees

Retirement Association retirees who have been retired for two full calendar years from 3% to 4%

annually.

FISCAL IMPLICATIONS

House Bill 304 – Page

2

PERA stated that SB 304 will cause a significant multimillion dollar fiscal impact on the PERA

fund, although no actuarial cost determination study was conducted to quantify this fiscal impact.

However, the 2003 supplement actuarial cost determination to calculate the effect of raising the

COLA from 3% to 3.5% for PERA retirees who have been retired 3 full calendar years

determined that an additional annual contribution of approximately 2.24 percent would be

required to fund the higher COLA. In addition, that study indicated the amortization period for

State General member coverage plans’ unfunded liabilities would increase from a then-35 years

to a projected 57 years. Any plan enhancement would require either pre-funding or an annual

contribution from the general fund for state-funded employers.

Any change to the PERA computerized pension administration system would require additional

change orders with the vendor. Past changes of more complex nature in FY05 cost PERA

approximately $50 thousand. HB 304 would impact the budget somewhat less.

SIGNIFICANT ISSUES

Prior to 1992, the PERA Act’s COLA provisions contained an adjustment factor that reflected

the change in the consumer price index (CPI-U), with a minimum and a maximum range for any

year. Current law provides PERA retirees who have been retired two full calendar years with a

3% COLA each July 1

st

. PERA retirees age 65 and PERA disability retirees receive a 3% COLA

each July 1

st

after one full calendar year. NMSA 1978, Section 10-11-118.

PERA noted that a comparison of the consumer price index to PERA’s annual 3% COLA for the

10-year period between 1994 and 2004 shows that the PERA Act’s 3% COLA gives the PERA

member a monthly benefit that is 6.25% higher than if the COLA was tied directly to the CPI-U.

Article XX, Section 22 of the Constitution of the State of New Mexico requires that any law that

will increase the benefits paid by the retirement system must be adequately funded. This

constitutional amendment precludes creating additional liabilities to the PERA retirement system

without providing adequate funding for those liabilities. All adjustments to the PERA Act’s

COLA provision, including rate increases and reduction of deferral periods, become permanent

liabilities to the fund and require a funding source to pass constitutional muster.

DOC stated that the cost of living increase will benefit public employees and help improve

morale during their working and retirement years. However, DOC also noted that HB 304 may

increase the turnover rate among agencies because employees will have more of an incentive to

retire after 25 years as opposed to working additional years (26.8 years for maximum benefits)

because of the 4 percent cost of living increase. Any program that encourages employees to

retire earlier would have a negative fiscal impact on the fund.

PERFORMANCE IMPLICATIONS

PERA noted that HB 304 would not impact its performance measures.

House Bill 304 – Page

3

ADMINISTRATIVE IMPLICATIONS

PERA claimed HB 304 will have an administrative impact on PERA. In the short term, PERA

will be required to implement changes to its pension administration system to reflect the

proposed COLA increase.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

HB 304 conflicts with SJM 6, which proposes a two-year moratorium on plan enhancements.

Article XX, Section 22 of the Constitution of the State of New Mexico requires that all benefit

enhancements be adequately funded. No appropriation is contained in HB 304.

ALTERNATIVES

Some pension plans fund COLA increases through establishing a reserve program, whereby

excess returns over the actuarial rate (8% for PERA) or excess funding over 100 percent liability

funding is accrued and paid as a COLA increase when sufficient funds have been generated.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

PERA retirees who have been retired two full calendar years will receive a 3% COLA each July

1

st

. Disability retirees and retirees who are at least age 65 prior to their first COLA eligibility

date have a reduced waiting period of one full calendar year.

MA/csd