Last February 17, the New Mexico State House approved legislation to reform its public pension system; the Senate had already approved the plan (though it needs final approval of technical changes) and it is expected to be signed by New Mexico Gov. Michelle Lujan Grisham.
Of note, Gov. Lujan Grisham is a Democrat, and both the House and Senate have substantial Democratic majorities. This is not a story of Republicans aggressively cutting public employee benefits to spite their political opponents. Instead, here’s what the governor had to say in a statement:
“With their vote today and with the tremendous bipartisan support this proposal has earned throughout the session, lawmakers have sent a clear message to public employees and public retirees: We will honor the promises that have been made, we will ensure the solvency of our retirement fund and New Mexico’s pension system will remain the best in the country . . . .
“There should be no illusion: These changes require sacrifice . . . . The legislation ensures the sacrifice is shared and that vulnerable groups are protected, as is retirees’ sacred defined benefit.”
Here are the particulars of the reform of the PERA (Public Employees Retirement Association of New Mexico) system, as described at Reason Foundation:
“the proposed legislation:
- Permanently increases employer and employee contributions to PERA by 2 percent each over four years;
- Transitions from a static, fixed cost-of-living adjustment (COLA) to a profit-sharing COLA for retirees up to 3 percent such that members directly share in plan investment gains in good times but that benefit accrual moderates in times of underperforming markets;
- Removes the 90 percent salary cap on pensionable compensation.”
The changed COLA is expected to vary between 0.5% and 3% each year and average out to 1.64% annually, compared to the current fixed 2%. In addition, to protect those most in need, retirees over age 75, disability-retirees, and those with at least 25 years of service but less than $25,000 in annual benefits would keep the existing COLA.
With respect to the contribution increase, Reason explains that the state sets its contributions as a fixed percent of payroll, which varies across divisions but averages out to 26.84% of payroll, so that, after the contribution increases have been fully phased in, this will amount to 30.84%. The PERA actuaries project that this rate has a 47% chance of boosting the 2043 funded status from the current 69% up to 100%, but there is no mechanism in the legislation for adjusting contributions over time if a recession or persistently low asset return mean this target is unlikely to be met — and, in fact, this is based on an asset return assumption of 7.25%, which is in line with other public pensions but above what Pew experts consider to actually be appropriate.
Did all Democrats support this plan? The Albuquerque Journal quotes one opponent:
“Miguel Gómez, executive director of Retired Public Employees of New Mexico, a nonprofit advocacy group, said the governor and lawmakers are rushing through the consideration of complex legislation. A cautious, modest approach to revising the pension system would be better, he said.
“‘There’s going to be a lot of pain for a lot of folks in New Mexico,’ Gómez said of the proposal, “and it’s just not necessary.’”
And the NM Political Report quotes a Representative’s objections in a floor speech:
“Rep. Moe Maestas, D-Albuquerque, argued there’s no reason why the state is obligated to have a public pension system that’s 100 percent funded, and he questioned the assumption that a market downturn is impending and would put PERA in a position in which it is unable to issue payouts.
“’What I fundamentally disagree with, and it permeates this building as a result of the banking crisis in ’08 … is this notion that these dramatic economic changes are gonna come some day and we have to prepare for them,’ Maestas said. ‘I have not seen a single document provided to me that even contemplates certain hypotheticals in regards to that.’
“’The government is not going belly up. We’re not gonna owe $6 billion tomorrow,’ he continued.”
Finally, it’s noteworthy that these reforms are an additional level of reforms on top of changes already made in 2013, which introduced a Tier 2 benefit structure with lower accrual rates and stricter retirement eligibilities. Why did the state, and the PERA Board of Trustees, simply cut costs with even greater benefit reductions for yet another group of newly-hired employees, rather than making COLA cuts and contribution increases for existing workers? Here’s their response:
“One of the PERA Board’s guiding principles for pension sustainability is intergenerational equity- the concept that future generations should not pay for pension benefits promised to current members and retirees. Tier 2 was successful in changing the projections of PERA funding status in 2043. A new tier for future employees that further reduces benefits would require a commensurate reduction in contributions and does not solve PERA’s current cash flow challenges.”
(”Intergenerational equity,” eh? Why does that sound familiar?)
None of which really gets to the underlying question: how did a Democratic governor, and a Democratic State House, and a Democratic State Senate, all come to the consensus to reform their pensions, even without the dire threat of funding levels as poor as, for example, Illinois’ 40% funding?
Recall that in my late February article on Court decisions on pension reform, I cited James Spiotto: “Since 2011, there have been over 25 major state court decisions dealing with pension reforms. Over 80% (21 out of 25) of those decisions affirmed pension reform which provided reductions of benefits, including COLA (“Cost of Living Allowance”), or increases of employee contributions.” In other words, the intransigence of a small number of states, Illinois included, is not the norm, when it comes to pension reform.
As always, you’re invited to comment at JaneTheActuary.com!
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