By Carter Bundy
The N.M. Legislative Finance Committee (LFC) just voted to introduce legislation to significantly reduce benefits in New Mexico’s public employee retirement plans (PERA). This is one of the least understood subjects in the state, yet affects tens of thousands of New Mexican families and retirees and impacts local economies in every corner of the state.
As a background to the current discussion, we should remember that just four months ago, PERA was in excellent shape. PERA, like any good pension fund, works with a 30- or 50-year horizon. Since mid-September, however, PERA’s investments have been hit hard, and that is driving understandably strong fears about future solvency.
There is some low-hanging fruit that the Legislature should pluck this year to make PERA more equitable and to begin to address future liabilities. But it is simply not true that slashing benefits to new employees is something that has to be done immediately, and there may be ways to change PERA that don’t undermine the crucial age and years-of-service standards that draw talented employees to public service.
That doesn’t mean no changes. It does mean that PERA funding and disbursement issues are complex. Solutions should be developed with input from retirees, current members, employee organizations, legislators, legislative staff, fund boards and staff, and public employers other than the state. After all, cities, counties, water utilities and other employers rely on and contribute to PERA, but haven’t yet given significant input into possible reforms.
Low-hanging fruit
During the last few years, PERA allowed members who retire to come back to work at full salary, without contributing to PERA, while collecting a full pension. This policy, called “return to work,” was designed to help keep skilled, experienced employees in tough-to-fill positions in rural areas.
While well intentioned, it has become a way to effectively double high-level employees’ salaries while depleting PERA of revenue and increasing PERA disbursements. Return-to-work is a way to game the system, hurting other PERA members and exposing taxpayers to greater liability down the road.
Over the last few years, we’ve all seen so much abuse of this program at all levels of government that we shouldn’t have even narrow exceptions. If a small town really needs to pay more to keep a water utility manager, or chief of police, that town should pay more (possibly with county and/or state help).
Finally, watching the same person come back to a good job at nearly double the salary is incredibly demoralizing to other employees, many of whom would love to step into a higher position at just the single regular salary. Double-dipping has to stop.
A second PERA issue that can and should be addressed now for new employees is “spiking.” PERA retirement is calculated off of an employee’s highest three years of salary. Spiking occurs when an employee takes on a much higher paying job only for a few years, and then receives a retirement far disproportionate to the amount s/he put in over the vast majority of his or her other years of service. The Legislature should adopt a fair way to limit these statistical anomalies.
Time to solve complex issues
The loss of about $3.3 billion — or 25 percent of the PERA fund’s value — over the last six months is legitimately terrifying to members and legislators alike. Members worry about whether PERA will be there when they retire, and legislators face a nightmare scenario of owing retirees a pension that isn’t funded in the future.
However — and this is critical — there is no immediate emergency, and there is literally almost no difference to PERA’s solvency if benefit changes for new employees are made on July 1, 2010 instead of July 1, 2009.
At a recent LFC hearing, Sens. Smith and Beffort each asked what happens if PERA loses another $3 billion in the next year. Excellent question.
The answer, however, is completely unrelated to whether we tweak, or even dramatically alter, PERA benefits for incoming employees beginning in July ‘09. Or whether changes are instituted in instead in July ‘10, after more thorough examination of both the degree and type of reform needed.
The $3.3 billion loss in the last half of 2008 is on the revenue side. The proposed LFC cuts to PERA are exclusively on the benefit/disbursement side.
In other words, putting off major PERA benefit/disbursement reform until 2010 does not expose the state to billions of dollars in potential losses on the revenue side — that exposure exists no matter what is done on the benefit/disbursement side. There is no reason to rush into slashing benefits when any such cuts are completely divorced from the issue of asset valuation.
Solutions
The last four months of asset devaluation have been scary. The LFC is wisely tackling the low-hanging fruit of return-to-work and spiking, but is also considering permanent, dramatic changes to benefits for new employees based on only two considerations: age and years of service.
Rather than trying to reduce payouts by changing the most important considerations for recruiting and retaining public servants, the LFC should weigh a variety of solutions, including the following:
• Adjusting the formula for final average salary.
• Varying the annual multiplier in the benefit formula.
• Matching the cost of living adjustment to inflation.
• Reviewing vesting periods.
• Altering caps on benefits and the timing of caps to incent workers to stay longer.
• Employer contribution rates.
• Employee contribution rates.
The Legislature should pull together a working group in calendar year 2009, and allow PERA’s actuaries to develop further information about the effects of the current four-month market downturn on a long-term fund. That’s far preferable to the understandable but, frankly, simplistic and rushed blanket attempt to permanently cut benefits.
Bundy is the political and legislative director for AFSCME in New Mexico. The opinions in his column are personal and do not necessarily reflect any official AFSCME position. You can learn more about him by clicking here. Contact him at carterbundy@yahoo.com.