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F I S C A L I M P A C T R E P O R T
SPONSOR Stewart
ORIGINAL DATE
LAST UPDATED
2-27-07
HB 1091
SHORT TITLE
EDUCATIONAL RETIREMENT BENEFITS &
CALCULATION
SB
ANALYST Aubel
APPROPRIATION (dollars in thousands)
Appropriation
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
Significant*
Recurring
ERA
(Parenthesis ( ) Indicate Expenditure Decreases
) * See narrative
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-Rec
ERA
(Parenthesis ( ) Indicate Expenditure Decreases)
Conflicts with SJM 6
SOURCES OF INFORMATION
LFC Files
Responses Received From
Educational Retirement Board (ERB)
New Mexico Higher Education Department (HED)
Public Education Department (PED)
SUMMARY
Synopsis of Bill
House Bill 1091 amends the Educational Retirement Act to increase retirement benefits, as
follows:
An increase in the multiplier would be phased-in over three years:
pg_0002
House Bill 1091 – Page
2
•
A member age 60 who is retiring between January 1, 2008 and December 31, 2008 to be
calculated with a .0240 factor rather than the current .0235 factor;
•
For members over 60 retiring between January 1, 2009 and December 31, 2009, the multiplier
will be increased to .0245
•
For members over 60 retiring between January 1, 2010 and December 31, 2010, the multiplier
will be based on a .0250 factor.
In addition, the legislation changes the method of calculation for the Final Average Salary (FAS)
from a five-year to a three-year period beginning January 1, 2008, based on the last three years
for which contributions were made or upon the basis of any consecutive three years for which
contribution was made by the member, whichever is higher.
FISCAL IMPLICATIONS
ERB’s actuary has indicated significant fiscal impact associated with the separate portions of this
legislation as follows:
Change in Multiplier
The estimated Unfunded Actuarial Accrued Liability is $479.3 million. If funded in accordance
with the GASB Actuarial Required Contribution (ARC) as a percent of payroll, an increase of
2.26 percent, or $52.7 million, would be needed as a contribution rate increase.
Item
Current Plan
Proposed HB 1091
Difference
Unfunded Actuarial Accrued
Liability (UAAL)
$3,622.4 million $4,101.7 million $479.3 million
Normal Cost %
13.56%
14.64%
1.08%
Funded Ratio
68.3%
65.6%
(2.7%)
GASB 25 Annual Required
Contribution (ARC)
$347.2 million $399.9 million $52.7 million
GASB 25 ARC as % payroll
14.51%
16.77%
2.26%
Three-Year Final Average Compensation (FAC)
The estimated Unfunded Actuarial Accrued Liability is $307.2 million. If funded in accordance
with the GASB ARC as a percent of payroll, an increase of 1.32 percent or $31.6 million would
be needed as a contribution rate increase.
Item
Current Plan
(5-Year FAC)
Proposed HB 1091
(3-Year FAC)
Difference
Unfunded Actuarial Accrued
Liability (UAAL)
$3,622.4 million $3,929.6 million $307.2 million
Normal Cost %
13.56%
14.12%
0.56%
Funded Ratio
68.3%
66.5%
(1.8%)
GASB 25 Annual Required
Contribution (ARC)
$347.2 million $378.8 million $31.6 million
GASB 25 ARC as % payroll
14.51%
15.83%
1.32%
pg_0003
House Bill 1091 – Page
3
ERB has indicated that the change in benefit calculation and tracking the three-year retirements
during the phase-in period would require changes to its computerized pension system. Such
change orders in the past have cost up to $50 thousand.
SIGNIFICANT ISSUES
Preserving the actuarial soundness of the ERA fund to meet the current and future obligations of
retirement benefits is a primary issue regarding HB 1091. The two main calculations used as
indicators of fund solvency are the Funding Ratio and Funding Period.
Funded Ratio. The funded ratio is the actuarial value of assets (AVA) expressed as a percentage
of actuarially accrued liabilities. On June 30, 2006 ERB’s funding ratio was 70 percent.
Generally, a funded ratio of at least 80 percent is considered satisfactory.
Funding Period. The unfunded actuarial liability (UAAL) is the dollar difference between a
plan’s actuarial liability and the actuarial value of its assets based on assumptions regarding
investment income return and demographic projections. The Governmental Accounting
Standards Board (GASB) states that the amortization period for any UAAL should be less than
30 years. On ERB’s UAAL at June 30, 2006 was $3.1 billion with a funding period of infinity.
Article XX Section 22 of the Constitution of the State of New Mexico requires that an increase
in benefits under the retirement system be adequately funded to preserve the ERA fund’s
actuarial soundness. HB 1031 does not provide for an appropriation for the actuarial liability
that the enhanced retirement benefits will cause. Nor does it provide for a combined employee
and employer contribution rate that is sufficient to amortize the combined increase in the UAAL
of $686.5 million over 30 years, given actuarial assumptions hold.
PERFORMANCE IMPLICATIONS
PED notes that HB 1091 has the potential to attract more people to the education field and brings
the education retirement benefits closer to those provided by the PERA plan.
HED also points out that the Educational Retirement Act relates to retirement for many
university and college personnel and suggests strengthening the Act and the fund will have a
positive impact on those faculty and staff covered through this plan.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
Conflicts with SJM 6, which proposes a 2-year moratorium on benefit enhancement legislation
affecting the Public Employees Retirement Association (PERA) and ERB through December 31,
2008.
TECHNICAL ISSUES
HB 1091 conflicts with the New Mexico Constitution that requires retirement enhancements to
be funded.
pg_0004
House Bill 1091 – Page
4
OTHER SUBSTANTIVE ISSUES
A comparison between the ERB and PERA General Plan 3 is as follows:
ERB
PERA – State Plan 3
Pension Factor
2.35%
Pension Factor
3.0%
Contributions
Employee and employer contributions
increasing 2 and 5 more years per SB 181:
Employee
Employer
FY 2005 7.6% 8.65%
FY 2006 7.675% 9.4%
FY 2007 7.75% 10.15%
FY 2008 7.825% 10.9%
FY 2009 7.9% 11.65%
FY 2010 7.9% 12.4%
FY 2011 7.9% 13.15%
FY 2012 7.9% 13.9%
Contributions
7.42% Employee
16.59% Employer
Note: PERA has 29 other plans with employee
contributions ranging from 7% to 16.65% and
employer contributions ranging from 7% to
25.72%.
Benefit Calculation
Final Average Salary of highest 5 consecutive
years of service
X
Years of service
X
.0235
No maximum benefit. 80% benefit is reached
after 34 years of service.
Benefit Calculation
Final Average Salary of highest 3 consecutive
years of service
X
Years of service
X
.03
Benefit maximizes at 80% with 26 yrs. and 8
months of service.
ERB and PERA Sample Retirement Comparison
Final Average Salary YR1 $42,000
High 3 year average (PERA) = $48,000
YR2 $44,000
High 3 year average (ERB) per HB 1091 = $48,000
YR3 $46,000
YR4 $48,000
YR5 $50,000 High 5 year average (ERB) = $46,000
PERA Retirement Benefit: $48,000 x 25 years of service x .03 = $36,000
Current ERB Retirement Benefit: $46,000 x 25 years of service x .0235 = $27,025
pg_0005
House Bill 1091 – Page
5
Under HB 1091, the retirement benefit would increase for ERB retirees over 60, as follows:
Retire January 1 – December 31, 2008: $28,800
Retire January 1 – December 31, 2009: $29,400
Retire January 1 – December 31, 2010: $30,000
WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL
The Educational Retirement Act would remain the same as currently administered.
MA/nt